Re-inventing public enterprises

W.C. DHEERASEKERA

PUBLIC ENTERPRISES: The Govt.-owned and managed business entities known as Public Enterprises (PEs) have shown a unique development pattern world-over the last two decades.

As a consequence of privatisation in quantitative terms a declining trend - a reduction of the number of PEs and their contribution to GDP are evident in some countries. PEs in Taiwan in the 50s and 60s accounted for a larger share of GDP than in ‘socialist’ developing countries such as India and Tanzania.

The share of PEs in manufacturing output of 56 per cent in Taiwan reduced to 21 per cent in the 60s and further declined to 10 per cent by 1990.

A similar trend - the downsizing of PEs is observed in Sri Lanka after the implementation of the privatisation programme.

In contrast, a qualitative improvement is evident in the PEs not subjected to the privatisation process in some European and Asian countries.

In fact those PEs, have expanded their production capacities, introduced new products and services by value addition and some of them have undertaken offshore investments as well.

For an example, French State-owned Edf has expanded its operations worldwide in the electricity industry. State-owned Alcatel of France - a leading telecom company in the world, recently acquired the US telecom major Lucent.

China National Machines and Equipment Import and Export Corporation (CEMEC) - a PE in China recently obtained exclusive rights for Beling Mines in Gabon as its offshore investment. Gazprom-Russia’s State-owned energy company is investing US$ 3 billion in Bolivia as its offshore investment to develop the Bolivian energy industry.

Those progressive PEs have undertaken offshore investments either as acquisitions or joint- ventures.

Accordingly, Hanjin Corporation - a public enterprise of South Korea acquired the shares of the counter part in Sri Lanka - Ceylon Steel Corporation. Similarly, Indian Oil Company (IOC) purchased a part of the assets of its counterpart in Sri Lanka - Ceylon Petroleum Corporation (CPC).

Incidentally, we describe these transactions as privatisation of PEs in Sri Lanka whereas those are actually offshore investments made by emerging multinational PEs.

Opponents as well as proponents of Globalisation and Privatisation envisaged that Corporate Multinationals will take over the assets of PEs and expand their global operations as in the case of privatisation of LPG business of CPC.

However, the visionary leadership of that global PEs through their foresight found opportunities to expand their global presence by making use of globalisation and the privatisation to their advantage and effectively competed with Corporate Multinationals.

If our policy makers, especially those who are involved in the privatisation exercise had a similar foresight we could have made the Sri Lanka Tyre Corporation (SLTC) a multinational PE and built a global brand image for ‘Kelani’ - the trade mark of the tyres manufactured by SLTC using mainly natural rubber procured from local sources.

However, the offshore investments made by that progressive PEs are not always favourably viewed by the host countries and sometimes they consider the global expansion of PEs as a threat.

China State-owned Energy Company CNOC recently moved to take over US Oil major UNOCAL Corp. But this offshore investment was stopped by the law makers in USA claiming it as a threat to their national security.

When Dubai Ports Authority initiated actions to acquire some sea ports in the east coast of USA similar sentiments were expressed and the law makers intervened. This intervention by law makers was hailed as ‘economic patriotism’ in USA.

Despite these setbacks cash rich progressive PEs continue with their offshore investments and present them as a global engine of economic growth to be reckoned with.

Meanwhile the visionary leadership of progressive PEs has implemented the economic patriotism policy in a rather subtle way in their respective countries by undertaking two business development strategies namely diversification and joint ventures to face the challenges of globalisation and privatisation effectively.

The French State-owned Company Gaz-de France recently acquired France’ power and water company Suez for two reasons.

Diversifying its activities is the first reason. The second reason is preventing the take over of Suez by a foreign PE namely, Italy’s ENEI.

China consolidated its PEs exposed to global competition by promoting joint ventures with corporate multinational companies. In the 70s Sri Lanka also adopted a similar strategy.

A case in point is the joint venture between Ceylon Ceramics Corporation and the Noritake Company in Japan. Through joint venture initiatives China obtained the latest technologies and access to global markets for their PEs.

Accordingly, 160,000 PEs in China have become dynamic business entities generating significant profits and account for 35 per cent of the country’s exports.

Thus the paradigm of synergy between State and market was achieved by China when they opened up their economy for the private sector without privatizing their PEs.

By adopting the dual strategy of diversification and joint venture development, leaders of progressive PEs also avoided the outcomes of de-skilling and the de-socialization of public enterprise management usually caused by privatisation.

According to Ali Farazmand deskilling and de-socialization serve two purposes. “They cripple the institutional capacity of public enterprises to manage efficiently and effectively. They also weaken the society-enhancing aspects of public enterprise management by eliminating its social welfare functions and the infrastructure building role that it has played in almost every nation-State for many centuries.”

In view of this resurgence of public enterprise management without subjugating to pervasive waves of privatisation, the current debate on PEs has shifted from the question about whether PEs are needed as a public policy instrument, to know-how to make them competitive business entities for the achievement of Millennium Development Goals MDGs).

For this purpose, United Nations Department of Economic and Social Affairs (UN-DESA) recently explored in-depth the key opportunities and challenges of PEs. Thus despite their shrinkage in numbers, PEs continued to remain as a dynamic engine of growth in several developed and developing countries.

Hence, there is a felt need to re-invent PEs to perform their designated economic development role more productively in an environment conditioned by the phenomenon of globalisation and the liberalisation as PEs are no longer considered policy instruments exclusively used in socialist/centrally planned economies.

Since the present regime has a favourable attitude towards PEs and the country has six decades of experience in handling modern PEs, Sri Lanka is well placed to undertake an exercise of re-inventing PEs for economic development.

Well known trade marks DI, MD in Sri Lanka are the acronyms of the Government Departments that set up PEs in 1940s. Since then under special Acts of Parliament a large number of PEs were set up, until the privatisation process began in 1980s.

Since the much needed cash to offset budget deficits had been generated by the sale of PEs, successive governments since 1985 viewed privatisation as a fund raising exercise for the General Treasury, not as an initiative for economic development through the introduction of new technologies and the penetration to new markets which are the hallmarks of the re-engineered PEs in the new by emerging economies in the world namely, China, India and Brazil.

However, re-inventing PEs is more intricate than re-engineering PEs, as it deals with a complete transformation of PEs to play an active role in a market economy. Interpretive marks on the present public policy on PEs also make the exercise of re-inventing PEs more complicated in Sri Lanka.

It is the declared public policy under the Mahinda Chintana; that the government will not undertake privatisation to sell the assets of PEs.

This policy is interpreted by the trade unions of PEs, as ensuring life-time employment for employees in PEs. The inference is that the government will sustain PEs under any circumstance to ensure job security for employees.

Thus, the present public policy on PEs virtually confines the role of government to the management of existing PEs in view of the over emphasised interest of one of the stakeholders of PEs, namely the employees.

It hardly addresses the issue of creating new PEs for the benefit of all the stakeholders as a public policy instrument for socio-economic development.

Moreover the institutional framework for PEs consists of Strategic Enterprise Management Agency (SEMA), Public Enterprise Reform Commission (PERC) and the Department of Public Enterprises (DPE) also confines its role to the management of the existing PEs.

No Strategic Plan is formulated by those public institutions to establish new PEs for development purposes.

Hence, PEs have fallen into a dormant sector. Public interest on PEs is dwindling as the management of PEs ostensibly focuses on the welfare of the employees and fails to offer their services/products to meet the expectations of the other stakeholders of PEs.

In these circumstances, it is necessary to clear the misconceptions on PEs, deter the misdirection of PEs by some of its trade unions and create awareness on the best practices of and the qualitative achievements made by PEs in other countries in the exercise of re-inventing PEs.

As a pre-condition for success of the re-invented PEs, the management team will be granted greater autonomy to conduct operational activities through statutory provisions.

Wishful thinking of politicians should not be allowed to override the judgment of the Board of Directors of PEs based on rigorous analysis of facts. Using the re-invented PEs to achieve short term political objectives of providing jobs for party supporters and favouring party financiers by awarding tenders will be determined as economic crimes.

With a view to reduce its capital outlay on new PEs the government may first explore the opportunities for joint ventures with PEs of other countries.

For an example to develop the mineral based industries through value-addition the government may form a PE as a joint venture with an overseas PE.

Besides having the matching capital funds raised, the new PEs through the joint venture will possess the most advanced technology and the access to global market. Accordingly, the re-invented PEs will be globally competitive enterprises.

However, if an overseas PE is not available for a joint venture, the government may have to provide the total capital requirements of the newly formed PE through its own sources.

At a later stage financing of new PEs can be undertaken through self generated funds. For this purpose, the government has to recycle the sale proceeds of its shares in re-invented PEs.

It is suggested that a Public Enterprise Development Fund (PEDF) be established as a venture capital fund by the government to finance the re-invented PEs.

By issuing bonds and recycling of sale proceeds of new PEs the funds required for PEDF can be raised. After paying a dividend tax to the General Treasury, a part of the profits of the re-invented PEs can be transferred to PEDF to augment its resource base.

When the Government of Sri Lanka (GOSL) after reaching the break-even point disposes a part of its share capital of the Joint Venture PEs, it will become a Public- Private Partnership (PPP).

In the case of new PEs totally funded by GOSL, when the Govt. sells its shares partially after reaching the break-even point that will also be categorized as PPPs. When GOSL or the foreign government sells all of its shares in PPPs, the enterprise will become a private enterprise.

Accordingly, re-invented PEs will not remain as PEs for ever. It will have a life cycle with three different stages.

Began as PEs in the first stage, the re-invented PEs will be transformed into PPPs at the second stage of its life and eventually become a public quoted private enterprise in the third stage.

Accordingly, a re-invented PE initially operates as a public-owned company (100 per cent shares held by the Government) and culminates its operation as a people-owned enterprise (registered as a People’s Company under the Companies Act) and trades its shares in the stock market.

Through this process the re-invented PEs will make a lasting contribution for the development of capital market in Sri Lanka.

However, it is observed that investors have very little power to add value to their investment in companies listed on the Stock Exchange.

Even those investors who have the knowledge and ability to add value to public quoted companies wherein they have invested their funds are reluctant to do so because other investors will obtain a ‘free ride’ through their initiatives.

On the other hand those investors, realising the fact that directors of their public quoted companies are not adding sufficient value as they expected will transfer their investment to other companies.

Those investors with business flair do know very well that without adding value, the business will not be able to retain its competitive advantages.

Unlike those investors who may withdraw their investments at any time by selling their shares, customers, employees and suppliers as stakeholders have a far greater interest in the public quoted company. These three stakeholders are therefore defined as strategic stakeholders of Re- invented PEs.

Accordingly, divesting shares of re-invented PEs can be undertaken to develop Stakeholder Economy by using employee share ownership plan (ESOP) to sell the shares to employees and introducing similar innovative financing mechanisms shares can be sold to the other two major stakeholders namely suppliers and consumers.

For an example, in a re-invented PE for the manufacture of rubber tyres, when it reaches break-even point a part of its shares can be sold to its employees using ESOP mechanism.

Some shares of the same re-invented PE can be offered to the Rubber Planters Association to get involvement of suppliers-the second strategic stakeholder of the enterprise.

The engagement of consumers the remaining strategic stakeholder can be ensured by selling another part of the shares to the Association of Rubber Tyre Dealers.

All these three stakeholders will hesitate to sell their shares and extend whatever assistance required by the re-invented PE to improve its competitiveness.

With a view to have equal status for the three stakeholders and to ensure that they will have controlling interest in the re-invented PEs, 20 per cent of the shares can be reserved to each of them.

The balance 40 per cent can be sold in the stock market to raise more funds required by the enterprise. Thus, through this initiative development of both the Stakeholder Economy and the development of Capital Market can be achieved.

PEs are also effectively used in some developed and developing countries to offer utility services at the local government levels.

Accordingly, transport, water, electricity and other public utility services are offered to local communities by the Municipal Councils, Town Councils and other local government agencies.

By offering these services, the local government agencies earn sufficient income to offer other services (public health, road maintenance) to the local communities effectively.

The Colombo Municipal Council offered transport, electricity and water services and other local government agencies distributed electricity through the respective municipal departments in the past.

With the establishment of Ceylon Electricity Board (CEB) and the National Water Supply & Drainage Board (NWS&DB) as PEs at the Central Government level distribution of electricity and water services were taken away from the local government agencies.

Having realised the importance of working with local government agencies for delivery of public utility services, GOSL already implements projects on alternate energy sources through them with donor assistance.

Uva Provincial Council made use of the energy services delivery (ESD) project implemented from 1997-2002, with its own subsidy scheme to promote solar electrification in Badulla and Moneragala Districts.

Accordingly, distribution function of electricity and water can be assigned to local government agencies and PEs or PPPs as re-invented PEs can be established by the Provincial Councils and the Municipal Councils for this purpose.

New transport services like ferry service can be started through re-invented PEs by Dehiwela-Mt. Lavinia and Negambo Municipal Councils as joint ventures with their overseas counterparts. Canadian Municipal Councils have established similar joint ventures in collaboration with Municipal councils in other countries.

Thus PEs can be re-invented to accelerate infrastructure development activities of the local government agencies (LGAs) and introduce innovative joint ventures in the management of LGAs.

Funds required for establishing and operating re-invented PEs by LGAs can be provided through Local Loans & Development Fund (LLDF) established under Ordinance No: 22 of 1916 and subsequently amended by a series of Ordinances and Acts. LLFD functioning as the lending institution for Asian Development Bank assisted Perennial Crop Development project for market development activities of LGAs.

Thus re-invented PEs is an innovative policy instrument in the field of public policy. Those new public enterprises will resolve the problems of economic disparity in the provinces, technology gap, and under-development of capital markets and introduce and develop stakeholder economy in the country and make a lasting contribution for the promotion of a Balanced Economy.

PEs managers can demonstrate their entrepreneurial flair by designing project proposals for re-invented PEs, introducing financing tools for funding them and also manage them efficiently.

However, deskilling of public enterprise managers during the last two decades has truncated entrepreneurship in PEs and created a shortage of competent managers to conduct the affairs of newly created PEs.

Hence, the government must introduce in-plant training and other management development programs for managers of PEs.

A team of selected managers has to be assigned to overseas PEs with global presence for this purpose. Bilateral technical assistance can be used for this type of overseas training programs.

One may re-invent PEs to deliver the best service or product in a particular industry, but without the services of competent managers it will not see the light and consequently deter the initiatives for driving a balanced economy.