Spyros K.Lioukas and Demetrios B.Papoulias
As in many countries, there is a critical public debate in Greece on the performance of state enterprises, with media reports of incidents or impressions of malfunction and inefficiency. Criticism is usually levelled at:
1. the low productivity of public enterprises, in particular that of their employees, who are perceived to return less than the privileges they assume;
2. the lack of innovation and management initiative;
3. the deficits in ‘problem’ firms and in some utilities.
State bureaucracy and tight controls, political interventionism, and outdated management systems and structures are assumed the main causes of low performance. Much of this criticism, however, is based on selective experience and partial case study, rather than on systematic research and analysis of performance, and the factors which affect it.
The present study1 provides evidence on the issue of public enterprise performance in Greece. It focuses on certain indicators of performance and attempts to highlight their relationship with certain key environmental and organizational factors. The study draws upon statistical analysis of a sample of about. 110 Greek public enterprises.
For the purpose of the present paper, public enterprises are defined as those enterprises whose majority capital is owned by the state at large, and which are engaged in ‘business-type’ activity, having their own balance sheet and profit-and-loss account.2 This population in Greece includes about 250–300 enterprises.3
Public enterprises in Greece occupy a significant part of the economy. Their total investment in 1985 accounted for more than 25 per cent of gross fixed capital formation in the economy as a whole.
Public enterprises dominate in the banking, energy, transport, and
tele communications sectors. Their presence in manufacturing is moderate in numbers, but considerable in assets. A smaller participation appears in commerce.4 The sample used in the present study includes business-type enterprises from all these sectors. It resulted from a survey based on a questionnaire which was dispatched to most of these enterprises by the Ministry of National Economy (Secretariat of Public Enterprises).
Effectiveness and its ‘determinants’
Assessing the performance of public enterprises is a theoretical challenge in itself, and has been far from resolved in the literature. In the context of a typical public enterprise, one finds both political and social considerations intertwined with economic or business-oriented criteria. Because of its proximity to the governmental and political arenas, it faces multiple goals with fuzzy, often unstable, priorities, reflecting the constantly changing equilibrium in the ‘political markets’.
It is well known that traditional profitability criteria, such as surplus or deficit and return on capital employed, are of limited value as indicators of performance. The information they provide is heavily distorted by government regulation and controls on strategic, managerial, and operational matters. Protected markets, subsidies, and pricing controls are important determinants of profit or loss. Social goals and policies are often imposed by government without compensation for the extra costs incurred and for the divergence from commercial and economic principles of operation.
The classical criteria of goal achievement in evaluating performance are not easily applicable in the case of public enterprises. Goals range from formal official objectives to those actually pursued by the enterprise, or implied from its decisions and actions. In most public enterprises the official objectives laid down by statute are too general to guide decision- making. Actual goals, on the other hand, are multiple, partly conflicting, with unclear priorities and trade-offs. Problems stem from both the multiplicity of controlling bodies, which have different views and perceptions on what the goals should be, and the politicization of many enterprise decisions. Trade-offs between conflicting views and values are affected by the wider political process. This often results in intensive political interventions in enterprise decisions and actions. In this political process, distinctions between ‘good’ and ‘bad’ performance cannot be based solely on profitability and efficiency criteria.
Under these conditions it would be useful to use multiple indicators, in line with the models advanced in the wider literature on organizational effectiveness. These include criteria such as goal achievement, ability to
acquire resources, flexibility/adaptability to a changing environment, participants’ or constituency satisfaction, and social justice.5
Measures of effectiveness
The present study uses two sets of effectiveness indicators, related to
‘efficiency’ and to ‘innovation’. The first set includes three commonly used efficiency indicators:
1. profitability is measured by the ratio of profits or losses to the capital employed (return-on-capital [ROC]); despite its shortcoming, profitability is a focal point of the public debate on the performance of public enterprises;
2. total factor productivity is measured by the ratio VA/(K+L), where VA is valued added and K,L are monetary values of capital and labour inputs respectively; in the case of public enterprises, this indicator appears to be more reliable than profitability, in the sense that it is less sensitive to accounting conventions and distortions;
3. capacity utilization (u), which because it depends on the particular production process and technology used, a relative measure was employed: this shows how average utilization compares with that of similar industries in domestic markets or abroad; it is however, a subjective measure based on managers’
perceptions.
The second set has three indicators of ‘innovation’:
4. acceptance of new ideas, a subjective measure showing the degree to which adoption of new methods and ideas is relatively easy, or meets strong reactions;
5. organized support to new ideas measures the extent of systematic, organized support to new ideas and innovation, as perceived by the managers themselves;
6. modernization investments is a composite measure showing the existence of investment initiatives and programmes—in the design of new products or services, the developments of materials technology, the introduction of information technology, in the production and administrative systems, and the modernization of production facilities.
‘Determining’ variables
With respect to the factors that may potentially have an impact on enterprise effectiveness, the following are included:
1. intensity of state control is a composite measure which gives the average of perceived intensity of control over resources (manpower finance, contracts, and supplies), pricing, and strategic decisions which shift substantially the boundaries of enterprise activity (e.g., diversification, large investments, or divestments);
2. competition, which is represented by two measures:
(i) perceived intensity of competition in domestic markets;
(ii) exposure of the enterprise to international competitive markets through exports and operations abroad;
3. internal decentralization within the enterprise is a composite measure which is the average of the perceived degree of influence that subunits and departments exert on budget allocations, investment and purchasing decisions, personnel recruitment, and production planning;
4. internal management systems, where the following composite variables were used, as assessed by the managers themselves:
(i) sophistication of corporate plans, measured by the depth of analyses performed in the five-year plan (examination of scenarios, parameters affecting demand and cost, risk analysis, organizational analysis);
(ii) development of computerized information systems (CIS) in accounting and finance, personnel, materials and purchasing, sales, production, administrative support, and top management;
(iii) existence of formal personnel evaluation systems (dummy variable);
These variables provide an indication of the development of the internal management systems and processes. Planning, CIS, and personnel evaluation systems are areas where much of the modernization effort is focused in Greek public enterprises.
Results
A cross-section analysis of the effects of these factors was undertaken, based on alternative multiple regression equations for each performance indicator. The significant effects which are supported by the regression results are outlined in Table 11.1. It appears from this table that across the spectrum of publicly owned enterprises, the following broad relationships obtain:
1. the intensity of state control is negatively associated with the innovation and capacity utilization indicators;
2. domestic competition is negatively associated with profitability and total factor productivity, suggesting that monopolies and protected industries are more profitable; by contrast, exposure to international
competition is positively related to three performance indicators:
ROC; capacity utilization; and receptability to new ideas;
3. decentralization of decision-making is positively associated with all
‘innovation’ indicators.
4. development of internal systems is generally positively associated with effectiveness, which appears both in the ‘efficiency’ and
‘innovation’ indicators.
Overall, a conjecture which emerges from these relationships is that the effectiveness of public enterprises is increasing with less government control, exposure to international competitive markets, decentralization of decision- making inside the enterprises, and development of internal management systems by the enterprise. Policy interventions can be proposed along the lines suggested by these factors. These may have a positive effect on effectiveness, at least with respect to the efficiency and innovation dimensions outlined above.
A discussion of the above relationships in the context of Greek public enterprises follows. This discussion is extended beyond strict statistical Table 11.1 Indicative relationships between effectiveness and selected explanatory factors for the population of public enterprises
Note: All + and - denote statistically significant relationships, positive and negative respectively, at a 0.10 level. Blanks indicate that no significant relationships were found. Results were derived from multiple regressions of each effectiveness indicator on explanatory variables (Lioukas et al. 1989).
Table 11.2 Intensity of control applied by ministries and holding organiaztions Notes: * In a scale from 1 (no control) to 10 (very tight control). Measurement was based on enterprises’ perceived degree of control in 13 separate dimensions. Questionnaire scales were from 1 to 5, but were transformed here to a scale from 1 to 10 **This refers to the most important enterprises in the sample for each controlling organization
results, and encompasses our reflections on personal experience.
Suggestions are also provided for policy directions that seem promising in improving enterprise effectiveness.
Discussion of results and policy directions
Control framework
The major characteristics of the control framework in Greece are;
1. it is tight, in all sectors of the economy for most types of publicly owned enterprises;
2. it focuses on a priori approvals;
3. it includes many controls which cover all enterprise activities (multiplicity of controls);
4. it allows intensive informal interventionism by government and politicization.
First, state control on public enterprise appears to be intense throughout.
The controls exercised cover all major enterprise decisions: major investments, differentiation and expansion in new products and markets, pricing, acquisition and mobilization of human and financial resources, top management appointments, purchasing and contracts, and various other day-to-day operational decisions. In general, enterprises in the sample which completed the questionnaire state that they have little autonomy.
Table 11.2 provides an indication of the average intensity of controls in certain groups of enterprises controlled by ministries and by ‘holding’
organizations. It appears that:
1. perceived control is intense under all supervision regimes;
2. enterprises directly controlled by the Ministries are subject to more intensive control than enterprises supervised by holdings;
3. there are differences among ministries and holding organizations.
The Ministry of Transport appears to exercise the closest control.
The commercial banks (National, Commercial) seem on average to allow more autonomy to their enterprises than investment banks (Agricultural Bank, Industrial Development Bank).
The specific control averages suggest that there are important differences in control regimes across the population of public enterprises.
The second major feature of control practice is that it is orientated to ex ante controls, based on a plethora of a priori approvals. In fact this is a wider characteristic of public administration in Greece. Supervising
bodies generally require the approval of decisions before they are implemented. This is partly enforced by regulations, and also by established practice. Sometimes, however, it may reflect the inability of state managers to assume responsibility and take initiatives. Thus it may conceal managerial inefficiency.
Established control practice results in issues and decisions being taken to many different supervisory bodies in search of approval. The process is focused on individual decisions and ad hoc approvals, rather than a consideration of total programmes, plans, and targets.
A striking absence of clear policies and objectives aggravates the problems with this piecemeal system of approvals. To an extent, government’s will and interventions may be internalized at the stage of initiating decisions inside an enterprise. This is helped by government’s power to appoint the majority of the board of directors and the top management, which is extensively exercised in practice. Nevertheless there have been occasions when ministries have withheld approval of decisions already taken by an appointed board of directors. As a result the attention of most enterprises is directed to the government Problems of overloading at the top and delays in decision-making are endemic.
A third characteristic of the control framework is the multiplicity of individual controls applied. As explained earlier, controls cover all major activities of the enterprise: strategic, managerial, and operational. They range from important decisions on large investments and pricing, to trivial decisions on software purchasing, vehicle utilization, and foreign travel approvals. Multiple supervising bodies are also involved in certain of these approvals. A problem therefore arises with respect to the different views of those involved, and the asymmetry in information and specialized knowledge which is concentrated in the larger enterprises.
Much inconsistency arises between these multiple controls. For instance a major investment project receives a series of approvals: first, indirectly as a component of the five-year plan which is submitted in the sponsoring ministry; second, as a separate investment scheme; third, further approvals are received with respect to implementation contracts and supplies, both through the submission by the enterprise of an annual purchasing plan to the Ministry of Commerce and through controls on individual contracts;
fourth, approvals are sought for human resources required for the new project etc. All these take place in different points of time, involve different controlling organs, and cover various aspects of the project. There is no guarantee that smaller partial controls and restrictions are in line with grand project approvals or that they will follow smoothly.
Fourth, informal ‘behind-the-scenes’ interventionism abounds, often for private or partly political reasons. Political survival and maximization of political capital, or minimization of political cost, are also widely used criteria in decision-making, in addition to technical and economic
criteria. Political interventionism often takes place through the government-appointed directors. Survival for top management is related to the degree to which they are able to understand the motives of ministers, politicians, or simply officials in key positions, and to achieving the balance of ‘political’ and ‘economic’ effectiveness which would satisfy these controllers in power. Disagreement and criticism of government are seldom a recipe for survival. Management can affect the outcome of this process by political mobilization and lobbying, not by technocratic arguments alone.
Examples of political interventionism can be found in many enterprises, particularly with personnel recruitment. Overmanning of many public enterprises in administrative personnel is a striking example. For instance during the period 1984–5 Olympic Catering appointed over a thousand people, who, as was widely admitted, were not necessary. Most of them were merely a result of political intervention, an outlet of the pressures exercised on politicians by voters seeking a public post This is a well- known phenomenon in Greece whose intensity peaks commonly before elections.
This tight control framework, in conjunction with dependence on the state for resources, subsidies or other favours, brings intensive informal interventions. Politicians acknowledge in theory the need for top management autonomy, but in practice find it difficult to resist the temptation to intervene at will. Public enterprises provide them with an opportunity to control the allocation of considerable amounts of resources away from the very visible and highly politicized process of public budgeting. Moreover, this informal interventionism allows politicians to distance themselves from enterprise decisions when these prove unpopular.
The above underlying factors produce the negative association between intensity of control and effectiveness which was found in the sample (see Table 11.1). Some plausible directions for improvement follow from this discussion.
1. Granting public enterprises more autonomy is likely to lead to improvement of their effectiveness, at least for the efficiency and innovation dimensions tested in this study. However, this has to be considered in the wider context of social and market-type controls.
What would happen if enterprises are given much autonomy without strengthening other types of control?
2. Shifting the emphasis to ex post and a posteriori controls, for example through auditing and performance evaluation against agreed plans and targets, is expected to have positive effects on performance. This would entail a radical transformation of the existing public management philosophy and may therefore impose special difficulties in implementation.
3. Reduction of multiple controls to a few, more comprehensive ones should also be considered. For example, introducing total cost targets, external financial limits, or approval of total plans, may render some of the existing partial controls unnecessary. Such a rationalization of controls would relieve many enterprises from dysfunctional overload at the top and heavy bureaucracy associated with it
4. Measures which limit some unwanted political interventionism should be introduced. For example, a system of ex ante compensation for interventions, together with a publication by the enterprise of interventions received and their costs, would be helpful. Extending the stability of top management, through guarantee of a minimum office period, restrictions in recall procedures, openness in the selection of top managers (perhaps use of parliamentary committees) are other measures which should be considered.
It is obvious, however, that all these directions for reform touch the wider political and administrative system of the country. Some recent examples, with participation of interest group and employee representatives on the boards of directors (‘socialization’ measures), introduced into several enterprises, have shown that devolution of the state’s power is not easy to implement.
Competition
The population of publicly owned enterprises includes those which operate in competitive environments, both in domestic markets and internationally.
Table 11.3 gives the proportions of enterprises in our sample, classified according to whether they are exposed to competition in domestic markets and in export markets. It appears that 19 per cent of the enterprises face weak competition or no competition at all, while 28 per cent face considerable competition, both at home and abroad.
Figures in parenthesis in Table 11.3 suggest that average return-on- capital is negative in three cells (about -6 per cent or -7 per cent) and zero in one. This shows that the state enterprises sector was running at a loss, in the period 1983–5.
One of the interesting findings is the positive effect of exposure to international competition. Greek public enterprises involved in competitive export markets have better profit performance than those not involved in export markets, or involved only through bilateral trade agreements (virtually no competition). The benefits of exposure to international competition are clearly evident. Table 11.3 shows that profit performance of enterprises which are involved in export markets but face no competition in domestic markets is particularly superior. Are profits in this case due to exploitation of domestic monopoly positions or to benefits arising from exposure to international competition? This