Public enterprise reform: Managerial autonomy, accountability and performance contracts
| Published date | 01 May 1993 |
| DOI | http://doi.org/10.1002/pad.4230130204 |
| Author | Nasir Islam |
| Date | 01 May 1993 |
PUBLIC ADMINISTRATION AND DEVELOPMENT, VOL.
13,129-152 (1993)
Public enterprise reform: managerial autonomy,
accountability and performance contracts
NASIR ISLAM
University
of
Ottawa,
Canada
SUMMARY
The underlying assumption in this paper is that autonomy and accountability are both funda-
mental prerequisites for the effective functioning of state-owned enterprises. The paper first
examines the traditional, dichotomous approach to the autonomy-accountability conundrum.
This approach posits the relationship as process oriented, pervasive, quantitative and based
on aprioricontrols.
A
more recent view
of
control and accountability as aposteriori, qualitative,
strategic, results-oriented and non-zero sum is then briefly analysed. The paper presents a
review of the theory and practice of performance contracts (PC) as tools to implement the
latter approach. Three basic models
of
PCs-Senegal’s contrat plan, Pakistan’s signalling
system and India’s memorandum of understanding-have been analysed, comparing the nego-
tiating process, major players, substantive elements and results. The contrat plan
is
more
of a legal document, at least in formal terms, than the other two. None of the three models,
however, provides any sanctions in case of a violation of the contract by the governments.
Although the Indian and Pakistani PCs appeared to be more successful than the Sknegalese
contracts, the relationship between financial performance and performance contracts remains
far from conclusive. In all the three countries, the contracts have failed to provide a single
window through which government-enterprise interface can be effectively managed. Thus
the problem of multiple principals and single agents remains unresolved.
INTRODUCTION
The state-owned enterprises
(SOEs)
were once considered to be the major instrument
of
national development in the Third World. During the last decade, they have
come to be regarded as bloated, money losing, white elephants. This paradigm shift
can be attributed
to
the changing ideological climate, as well as the declining perform-
ance of the
SOEs
during the last two decades. The optimistic and confident dirigism
of
the
1950s
slowly gave way to what Bardhan has called the neoclassical accounts
of the failures and disasters of the interventionist states (Bardhan,
1990,
pp.
3-7).
More recently, however, it is being recognized that there has been too much emphasis
by the neoclassists
on
the extent rather than the quality of state intervention. In
this context, it is perhaps timely to review the literature and arguments on the most
important instrument
of
state intervention in the Third World. This paper proposes
to
review the major developments in managing the government-SOE interface in
the context of Asian and African countries. The paper will review the theory and
Professor Islam is in the Faculty
of
Administration at the University
of
Ottawa,
136
Jean-Jacques Lussier,
Ottawa, Ontario, Canada
KIN
6N5.
0271-2075/93/020129-24!$17.00
0
1993
by John Wiley
&
Sons, Ltd.
130
N.
Islam
practice of state control
of
public enterprises
(PEs)
and implications
for
enterprise
autonomy and accountability.
The basic assumption in this paper is that autonomy on the one hand and control/
accountability on the other, are the fundamental prerequisites for the effective func-
tioning
of
a
SOE.
However contradictory these concepts may appear, SOEs have
to maintain a framework
of
coexistence between the two elements. Control and
accountability should not be interpreted
so
as they deteriorate to the level
of
constant
interference in operational decisions, nor should autonomy be treated as a licence
for laissez-faire. The traditional literature on
SOEs
presents the accountability-auton-
omy issue as the problem of achieving balance between the two variables. The paper
will review the nature of balance or trade-off and the control mechanism used to
induce this balance. The very history of the
SOE
reform is the history of experimen-
tation with various control devices-boards of directors, holding corporations,
bureaus/ministries of PEs-dealing with this dichotomy. The latest control instru-
ment, which has emerged to be the most popular, is the performance contract (PC).
This paper will describe the evolution of the PC concept and its application in African
and Asian countries with particular reference to the contract plan in Senegal, the
signalling system
in
Pakistan and the memorandum of understanding in India.
Most Third-World governments resorted to the creation of
SOEs
for a combination
of ideological preferences and pragmatic reasons. Market failures, presence
of
natural
monopolies, social externalities and production of merit goods are often cited as
some of the major rationales for the birth of the major
SOEs
in many countries.
National development corporations were created in Ghana, Kenya, Nigeria, Pakistan
and Tanzania. The Indian industrial policy called for the establishment of public
enterprises in key sectors of the economy to accelerate the process
of
industrialization.
The Nigerian government used the
SOEs
to
enable indigenous Nigerians to own,
direct and manage enterprises. Many governments used the device to reduce foreign
control of their economies. Uganda under Idi Amin, Egypt in 1956 and Madagaskar
in 1974 are some of the major examples (see United Nations, 1967, 1974). Many
governments used the
SOE
as an instrument to control and develop the strategic
sectors-the so-called commanding heights-of their economies. India, Pakistan,
Tanzania and Nigeria are some examples. Most Third-World governments had little
choice other than to use the
SOEs
as the main instrument of economic development
activity. As Fashole-Luke points out, it was a pragmatic response
to
prevailing reali-
ties, in the context of rising expectations, modernizing goals and incipient capitalism
(Fashole-Luke, 1988,
p.
164).
Whatever the rationale and reasons for their creation, they muItipIied with ven-
geance during the first three decades of development. Proliferation is the word most
often used for the increase in their numbers during this period. The number of
SOEs
stood just over
100
in 1960 in Brazil, by 1980 it was almost
500.
Mexico
had just below
200
SOEs
in 1960. By 1980, this number had risen to over
500.
Tanzania which registered about
150
enterprises in 1967 had 400 by 1981. These
numbers do not include the financial institutions (World Bank, 1983, pp. 48-49).
The
SOEs
acquired an important position in the economies of most developing
countries. By 1980, they accounted for
SO
per cent of the value added in manufacturing
and almost
15
per cent of the non-agricultural employment in Less Developed Coun-
tries (LDCs) (Nellis and Kikeri, 1989, p. 659). The pattern of ownership varied
in various countries. Large-scale manufacturing, mining and financial sectors were
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