Public enterprise management has emerged as one of the most pressing policy problems today. In finding the way ahead, it will be useful to learn not only from our failures but also from our successes. Although, now largely forgotten, one of the most successful systems of performance-based management of public enterprises was designed and implemented in Pakistan in 1980s. Here’s a review of that experience.
Public enterprise management has emerged as one of the most pressing policy problems today. In finding the way ahead, it will be useful to learn not only from our failures but also from our successes. Although, now largely forgotten, one of the most successful systems of performance-based management of public enterprises was designed and implemented in Pakistan in 1980s. Here’s a review of that experience.
History
In the 1970s the public industrial sector in Pakistan experienced a rapid expansion. With the merger of 33 nationalised industrial units with 29 existing enterprises of Pakistan Industrial Development Corporation (PIDC) a large industrial conglomerate of about 60 enterprises was created. This conglomerate of public industrial enterprises (PIEs) was managed by 10 holding corporations, which in turn were supervised by a super-holding corporation, the Board of Industrial Management (BIM).
Since the size of this conglomerate was too large for the existing management capacity, it incurred heavy losses. To address this issue the government launched a program to reform public industrial sector. Under this program, BIM was wound up and PIEs were brought directly under the control of the Ministry of Production (MoP). To manage the PIEs on professional lines a highly professional body called “Experts Advisory Cell” (EAC) was set up.
Thus, the new reorganised public industrial sector comprised an administrative ministry (i.e. MoP) controlling 60 units through eight holding corporations and an active and independent professional EAC. The EAC was managed by a small board, chaired by the minister for production. The cell operated as an independent body with its own service rules and pay packages. It was funded by the corporations, which were evaluated by it. The pay scale of the employees of EAC was higher than those of civil servants in the ministry. It was able therefore to attract a highly qualified multi-disciplinary team of professionals with backgrounds in economics, finance, engineering, information technology, etc. Since the minister of production was in charge of the ministry as well as that of EAC the two organisations worked closely.
The operating enterprises were supervised by the respective board of directors, where the managing directors (MDs) were appointed by the MoP. They were stated to be autonomous and were managed independently. However, this independence was exercised only by selected enterprises and in selected areas. The operating units were frequently guided by the MoP and ministerial interference was frequent. Consequently, public industrial enterprises continued to incur heavy losses. There was a need for reform to improve the performance of the operating units.
The systems
Consequently, in 1980, in collaboration with Boston and Harvard Universities and with the support of the World Bank, the EAC launched a major reform programme. It conceived and developed a system named as “Signalling System for Public Enterprises”, which proved to be highly successful. The system consisted of three component systems:
1. Performance Information System
2. Performance Evaluation System
3. Incentive System
The Signalling System was managed under the concept that the managers of the PIEs should be controlled by results, not processes. It also ensured that managers should be clear about the objectives of the enterprise, and they should be free from the plurality of controls of various stakeholders. To achieve these objectives the Signalling System provided the concept of pre-negotiated targets, as the basis for an annual performance evaluation of management and enterprises.
Enterprise managers submitted their budgets to the EAC at the beginning of the year. The budget formats were specially designed by the EAC, whose professionals examined the proposed budgets and negotiated targets for the year with a focus on minimisation of cost. Thus, from the beginning of the year, enterprise managers knew exactly what they were to do during the course of the year to achieve their objectives.
In order to monitor performance against targets during the course of the year a Management Information System (MIS) was installed to act as early warning system. The MIS generated monthly reports that monitored any deviation from targets, so that required action could be taken in time.
At the end of the year, a diagnostic report was prepared in which, based on audited statements, performance was evaluated against the set targets. The report evaluated performance after isolating it from favourable or unfavourable developments during the year.
The objective of the evaluation was to identify the real efforts made by the managers. Based on these evaluation reports enterprises were ranked in one of the five categories (A-E), each linked with a performance bonus: Category A qualified for three months’ bonus, B for two months’, C for one month’s, D for 15 days’, while E for none.
The result of the Signalling System proved to be extremely effective and led to the PIE sector’s turning the corner from incurring heavy losses to making profits. This was due to a major change in the behaviour of the successful mangers that became achievement-oriented under the influence of the system.
Naturally, over the course of time certain weaknesses were identified in the Signalling System. The most important of these was that the managers’ performance tended to be focused on a static period, i.e. one year. In order to broaden the managers “performance objective horizon” from short-term to medium- and long-term, the EAC professionals developed a corporate planning system. These corporate plans were prepared to extend the focus of management from one to five years. To achieve this objective, the EAC obtained World Bank support to acquire the technique of preparing corporate plans. The World Bank assisted the EAC in obtaining “Arthur D. Little (ADL) model” for developing corporate plans of PIEs. The main features of ADL corporate model were the following:
1. Identify the activity or the unit for which the plan is to be prepared. This unit was called Strategic Business Unit (SBU).
2. Analyse the competitive position (on a scale varying from ‘dominant’ to ‘weak’) of the SBU and also assess the stage of its maturity (along a scale, from embryonic to aging), reflecting the natural process that an industry follows during its lifetime.
3. Identify the ‘strategic condition’ of the SBU, by combining the two indicators i.e. competitive position and maturity stage. The strategic conditions in the light of ‘business mission’ assist in identifying the ‘functional strategies’. This in turn helps in developing ‘action plans’ in various areas of SBU operations i.e. marketing, operations, engineering and HR re-structuring etc., which finally result in development of a comprehensive plan for a five-year period.
The corporate plan was also linked with the performance evaluation system of the Signalling System. This was achieved by making the first year’s plan of the five-year plan the basis for preparing the SBU’s annual budget for the year.
Thus, the two systems (i.e. the Signalling and the Corporate Planning systems) helped in developing a program and strategy for improving performance in short- and long-term. These key elements of SOEs reform program helped in attaining the primary objective of EAC that was improving the performance and in turn the profitability of public industrial enterprises.
Success, recognition & impact
The development and operation of SOEs reform program of the EAC resulted in turning around of PIEs. This change from heavy losses in early 1980s to profitable position in the late 1980s was achieved in short period i.e. three years. Various studies by World Bank experts like Mary Shirley and John Nellis verified the achievements of the EAC and contribution of its systems on PIEs’ improved performance. In a World Bank study titled “Evaluating the Performance of Public Enterprises in Pakistan”, Shirley concluded that performance of public industrial enterprises generally improved by the application of the signaling system. In her study thirty three PIEs were covered by the system during the first three years of operations of which 19 (or about 58 percent) recorded improvement in profits after tax, from Rs100 million in 1982/83 to Rs617 million in 1985/86.
Fourteen showed deterioration from Rs445 million to Rs67 million. Thus the majority of these PIEs showed an improvement in the main indicators. "After 3 years the total profit of the 33 PIEs in the system was almost twice what it had been before the system began”.
This accomplishments of the EAC were acknowledged not only in the country but also outside. Within Pakistan, it was decided in the 1990s to expand the scope of the Signalling System from manufacturing sector to large non-manufacturing public enterprises like Railways, Pakistan International Airlines (PIA), National Highway Authority (NHA), and Water & Power Development Authority (WAPDA) etc. Internationally, following developments indicate the recognition of the EACs reforms efforts:
In early 1980s a team of the EAC headed by its chief was invited by the World Bank to its head office in Washington DC to give a presentation on the EAC’s SOEs systems and their achievements. The objective was to introduce the Signalling System to the World Bank officials and representatives of various countries so that they could learn from Pakistan’s experience.
Number of delegations from various countries visited the EAC to study its model and achievements.
The EAC’s experts were invited by the various countries like, Mexico, Philippines, and India etc. to assist in setting up the systems conceived and evolved by them.
In 1990s an EAC chief was elected as chairman of the International Center of Public Enterprise (ICPE) Slovenia for four years. He was also elected chairman of a ministerial committee constituted by the ICPE assembly to restructure ICPE.
The EAC’s success is reflected by the fact that although the EAC was disbanded in Pakistan in 2005, in anticipation that all PIEs will be privatised and there will not be any takers of its management systems, the selected systems like Signalling System continue to operate in many countries including those in the neighboring countries like India (in the name of MOU system) etc.
For the past more than 20 years, the SOEs have been neglected by the economic managers of Pakistan. As a result, currently the SOEs are incurring annual losses of the more then Rs1 trillion every year.
The government that is currently striving to address the ongoing economic malaise can certainly benefit from this homegrown programme, developed by EAC, as it can become an important component of its efforts to reform as well as revive the ailing SOEs of the country.
The writer is a former chief of EAC
