Forum (Spotlight Weekly)

Why Managing SOEs Is Different

By NARAYAN MANANDHAR

Often people erroneously believe that managing state-owned enterprises (SOEs/public enterprises) is an easy job. Unlike in the private sector, SOE managers do not have to face hard-budget constraints because the government is always there to rescue them out of financial difficulties. The managers are not accountable to the shareholders because there are no discernible shareholders. Managers do not have specific profit goals. Even if they do, they can safely play with their vague, complex, confusing and non-quantifiable social goals. Enterprise losses can be excused for undertaking social obligations. SOEs often have market monopoly and easy access to government protection. In case the going get tough, personally, managers themselves have a fallback job. There is even an argument that since SOEs are creations of the state, hardly any government would be willing to kill its own children. If there are no constraints, why you need managing?

Basically, the function of management is to work within a set of constraints. You relax constraints and there remains nothing to manage. Instead of managing, one may be possibly administrating or functioning like a government unit. This is exactly what happens with SOEs. The fundamental flaw with the poor performance of SOEs is the government's inability to construct a proper management system that is applicable to the running of SOEs. While managing SOEs, one can replicate neither the government's bureaucratic system nor the profit-maximizing behavior of the private-sector management. Nobel Laureate Amartya Sen once said, "Having established a public enterprise and asking it to behave like a private sector is like going to the cinema hall, not for viewing a movie but for sleep". The end determines the means and not the other way round. The confusion with SOE management is the inability to define the links between ends and means. If SOEs are not an appropriate instrument to attain specified goals, it is better to close the enterprise and look for alternative solutions than to pretend that it is working.

Public enterprises are hybrid organizations having to meet 'public' and 'enterprise' goals. It is often like having your two feet placed in two different boats, often the boats may be moving in opposite directions. The managers are asked to make profit and at the same time contribute to social goals like supplying goods at below market prices, providing jobs to the people, donating money for social works, and buying raw materials at inflated prices for reasons known only to the minister. Public enterprise decisions are often used to smokescreen unpopular political decisions or deflect public scrutiny. Therefore, in parliament, when questions are raised over the rise in the prices of cement, sugar or electricity, it will not be the government's job to take responsibility. You blame Hetauda Cement Factory, Birgunj Sugar Factory or Nepal Electricity Authority. Who knows, possibly the manager may be grilled, transferred or sacked as a show of government action and determination. Public enterprises are easy and efficient scapegoats for inefficient policy decisions.

If managing public enterprises is a complex business, what do the managers themselves do? The best policy is to "not to rock the boat". What you do is you go with the flow. The public enterprise manager runs the risks of failure and also those of success. The risks of failure are self-evident. Those of success need some explanation here. If you become a successful public enterprise manager, say, due to your hard work and dedication you turn around RNAC from near collapse, there is every chance that you may be transferred to another sick and dying SOE in the hope that that you would replicate the magic there. This is called the risk of success. Therefore, the best policy for the manager is "not to rock the boat" and go with the flow. This must be the reason why a public enterprise manager once joked with this scribe. In his words, "We do not have byabasthapan (management) here, what we have here is byawastapan (carelessness)."

Moreover, if your company is sick and dying, you can evade or ward off ministerial interference. No minister will like to have hangers-on appointed to sick and dying enterprises. Can you suck blood out of a sick and dying person? Even a vampire won't think of doing that. No union will bother you with demands for bonus when your bottom line is all red. Have handsome profits and you invite the prying eyes of the minister, unions and tax officer. Who knows, even the consumers may blame you for exploitation. Have losses and you are a sympathetic candidate for government subsidy. When the whole of the economy thrives in inefficiency and corruption, what is the point in being efficient and honest?

What happens in the end is that public enterprises become neither public nor enterprising. They become political enterprises established to attain specific political goals. Such political goals are providing job opportunities to the party workers, friends and relatives, giving contracts to large business houses that have supported election campaigns, siphoning off enterprise resources for attaining specific political goals which otherwise would have been difficult to get through regular budgetary operations. Therefore, unless the SOE managers become shrewd political managers, there is little scope in exhibiting managerial talents. The political manager assumes that his posting in the enterprise is a mere extension of his political career, his job is to maximize votes, fulfill partisan interests and build the empire. Without understanding these political ramifications, managing SOEs is not only different but also difficult.