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Government must be more like a business By Dinesh
Weerakkody Private Sector
Criteria In the case
of public enterprise, setting performance criteria and performance
evaluation is very difficult because goals are difficult to specify.
Organizations without meaningful and quantifiable objectives have
great difficulty in controlling efficiency. If poor performance
is justified by the achievement of vague "socio-economic"
objectives and no effort is made to distinguish between genuine
reasons for poor commercial performance, the organization then in
effect tends to lose direction and inefficiency ensures. There is
a clear case, therefore, for introducing a specific public enterprise
performance evaluation system to assess whether public funds are
being spent economically, efficiently and effectively. Often their
performance has attracted much attention and criticism, often hostile,
over the years. The critics have generally concentrated on their
financial performance, usually on their failure to hit financial
targets. However, financial results alone are inadequate and can
be misleading. When evaluating how well public enterprises are performing,
questions should also be asked from the government whether or not
there is a requirement for greater accountability from public enterprises,
where performance cannot be fully tested using accounting information.
Disagreement between the many critics and parties involved in, or
effected by public entities often stems from their differing views
on how public entities should operate. Some people feel that the
industries should operate like companies in the private sector,
with profit and profitability as the major objectives and measures
of success. Others would accept "reasonable profit" or
"minimum loss" to commensurate with the consideration
of other objectives, on the other hand, the government would regard
social goals as paramount and accept the resulting "accounting
losses" and concentrate providing subsidies from public taxation
and the government coffers. However, in recent years concern about
the management of public resources and how public money is spent
including how well it is spent have led public sector entities to
reconsider the desirability of any profitability criteria as a measure
of assessing its performance. The objectives of each public enterprise
are stated in the acts of parliament which establishes the industry
therefore these objectives should provide the broad criteria by
which the performance of public enterprises are to be judged, though
each public entity lays down obligations and duties specific to
the particular industry. The following objectives are common to
all state enterprises. * To provide
on a continuing basis a particular product or service, to break
even taking one year with another, * To take into
account the public interest especially with regard to employees
and the community. The acceptance of multiple objectives, and the
use that governments make of the public corporations in carrying
out macro-economic policies, mean that performance of state entities
cannot be fully tested by any profitability criteria. Given the
wide range of objectives that are considered appropriate in state
enterprises it is clearly unrealistic to assess performance within
the narrow framework of historical financial accounting. In a practical
sense a wide range of performance indicators are necessary to assess
the many different aspects of performance. Therefore it is unrealistic
to pass judgment as a whole using a few key figures of profitability
ratios. However it
is important to be mindful that the financial targets are clearly
a critical measure of performance and corresponds closely to the
financial measures used in the private sector. However, they need
to be linked to the performance in non-financial terms that is achieved
by the corporations. The use of
the performance indicators helps the public and the government to
assess the performance of public enterprises. More fully and realistically
than had been in the past using profitability criteria. It is also
arguably part of the widening of the horizons of accounting. State
entities which are expected to be profit making do not operate to
achieve only commercial and financial objectives, therefore they
are obliged to pursue policies which provide social welfare to society.
Ideally public enterprises should provide measures of their progress
towards social goals such as: a) Employment b) Quality of goods
and services produced c) Benefits to society as a whole and the
effects of pursuing "uneconomic" policies should be shown
separately in the profit and loss statement so that costs and benefits
can be evaluated and the overall profit or loss interpreted with
better understanding, thus stressing the importance of public enterprises
in Sri Lanka as an instrument of government domestic and international
policy. Professional
Management There is a myth that private sector managers can solve everything. Obviously if someone who is properly trained and qualified is put in charge all will be well. Therefore performance improvement in state enterprises could be stimulated through the professionalism of internal management, including the participation of non-political workers in decision making. Lastly, the shape and the direction of our economy and the success or otherwise of the ambitious national programmes are undoubtedly dependent upon the effectiveness of our public enterprises. Therefore it is the duty of any government to manage these enterprises in the best interest of the general public. Finally, the gradual moves into a liberal world economic environment combined with technological advances would require new thinking and skills from those people managing these enterprises. The effectiveness of our public enterprises will depend on whether the government can provide that educational re-tooling to those managers in key positions and employ competent and dynamic people to head these institutions. The government should make every effort to commercialize (manage it like a private sector institution) some of the key state institutions to induce a new wave of efficiency and profitability. In the final analysis it is important to give the management the flexibility in the running the enterprises in order to achieve the set targets; the control should be through evaluation of performance on an ex-post facto basis rather than the process. By Prakash
Jerome This article
discusses an equilibrium growth model that could be used to analyse
and manage. First of all let us consider a hypothetical case to
illustrate the model. Calibrator Ltd Balance Sheet and Profit and
Loss statement extracts are given in the table. If we study
this statement we would conclude the following: Sales have grown
15 % per annum. Current Ratio has (Current Assets/Current Liabilities)
has deteriorated from 2.3 in 1995 to 1.64 in 1996 and further down
to 1.38. If this pattern is allowed to continue, Calibrator would
find itself in a financial crisis. Debts to Total
Assets have increased from 36 % in 1995 to 47% in 1996. The startling
increase has occurred in 1997, where debt represents 61 % of total
assets. It is apparent
from the above that Calibrator has set a course to financial turmoil
and it requires urgent management action to redirect the company's
destiny. It is also
observed that the 71 % increase in the balance sheet over the two
years was financed mainly by short-term borrowing. In view of the above situation, Calibrate's management would have two options: Reduce current
assets and/or introduce long-term funds in the form of an equity
or loan. If we consider
the latter option of introducing long-term funds, we may find ourselves
servicing increased debts and that the present cash haemorrhage
would continue. Therefore, we shall discard this option, for arguments
sake at least! So to answer,
what rate of growth Calibrate Ltd can sustain, we have to identify
three critical drivers. They would be: - Sales - as
this is the key growth driver - Current assets
- Increase in sales would naturally requires current assets, i.e.
increased working capital requirement, to fund debtors, inventories,
etc. - Retained
earnings: We make an assumption, at this point that retained earnings
would fund increased current assets. The relationship
of the above drivers give rise to the following: Current assets
to sales (Current assets/sales) 1505/2310 = 0.65. This factor indicates
that every Rs. 1 sale requires 65 cts of current assets. Hence an
increase of Rs. 1,000 requires Rs. 650 increase in current assets. Retained earnings
to sales (Retained earnings/sales) 45/2310 = 0.02: i.e. each sales
generate retained earnings of 2 cents. As per the above the equilibrium
growth model would be: Retained Earnings
to Sales which is growth of sales x Current Assets to Sales = Equilibrium
Factor Therefore,
Calibrate Ltd's present equilibrium factor would be: (0.02/0.15
x 0 .65) = 0.2, which suggests that 20 % of sales are internally
funded, whilst the balance 80 % of funds are externally funded. It could be
seen that Calibrates is over dependant on external funds to sustain
its sales growth. Ideally increased sales should be 100 % self funded
or internally funded. In order to
correct the above situation, Calibrate Ltd' s management would seek
to manipulate the following; Change the
growth of sales Increase retained
earnings Change current
assets Therefore the
management strategy might be to: Increase earning
to sales to 5 % Reduce sales
growth rate to 10 % Reduce current
assets to sales to 50 % The above combination
would allow Calibrate Ltd to be 100 % self-dependant on growth.
(0.05/0.1 x 0.5) The above model
suggests that only current assets and retained earnings are utilized
to fund growth, whereas other sources can also be included. Secondly
as a result of this assumption we have ignored, all other assets,
equity and long term loans. Therefore to allow for above deficiencies we can express growth to be ideally a function of retained earnings as a percentage of owners' funds. Growth in excess of this expression would require extra equity or will cause a weakening in the ratios. The above illustrates the important impact retained earnings has upon growth. Therefore management must be weary of this retained earnings to equity, which would assist in planning company growth. Earning three times your salary Konosuke Matsushita,
President of the PHP Institute in Japan and who built the giant
Matsushita Corporation, has a few words of advice: "Do not
assume that the fruits of your labour are all yours. Remember that
you also share in other people's labour. And, above all, people
who earn money the hard way must be duly rewarded." In a recent
article, the well-known Japanese business tycoon said: "I was
board chairman of Matsushita Electric for 12 years from 1961. One
day around 1970, I had the chance for an informal chat with about
20 section chiefs and other Junior Executives of equivalent rank.
By then Matsushita Electric had more than 30,000 employees, so I
knew neither the names nor the faces of those who assembled that
day." "As I
sat down, I found a sheaf of papers prepared so that I would be
able to identify the other people in the room. One was a diagram
showing where each person was sitting and to which department he
was currently assigned. On the remaining three pages was a sketch
of each person, including the school he graduated from, the year
he joined the company, and a brief description of the posts he had
held in the company up to that time." "While
I appreciated the efforts that had gone into preparing the data,
I found it quite inconvenient to have to compare and co-ordinate
two separate sets of documents. The minimum necessary information
could have been put together on one page, using codes and abbreviations,
and it would have saved a lot of my time as well as that of the
Staff themselves. "As the highest paid man in the company,
I have to make the most of my time. Don't make me waste even a minute,'
I told the man responsible for planning the occasion." "I wasn't
trying to find fault with my staff, nor was it my intention to preach
frugality. What I had in mind was something more basic, as I tried
to explain to the Junior Executives as soon as the meeting started." "Suppose
I'm making Y (Yen) 1 million a month. If I only did Y 1 million
worth of work, the company has nothing to gain. I should be earning
at least 10 times as much, or preferably a 100 times. I always ask
myself if my work merits the salary I'm getting so that the company
has enough profits to reinvest and pay taxes and dividends." "I hope
each of you will ask the same question from time to time. Try to
evaluate your performance at the end of every month and figure out
how much you have contributed to the company that month. It's hard
to generalize, but I think it's fair to say that each employee should
earn at least three times his/her salary. If you make Y 1000,000
a month, your minimum necessary contribution will be Y 300,000.
That will cover all your fringe benefits plus your share of the
overheads costs." "But what
about investments in research and development as well as plant and
equipment, taxes to the public coffer, dividends to our shareholders,
and all the social costs? So you must earn Y 500,000 to enable the
company to perform its corporate mission and fulfil its responsibilities
to society. One million yen would even be better." "I urged the section chiefs assembled to do some soul searching about the way they approach their job… how to raise efficiency and quality of work. All their subordinates should do likewise, and when everyone on the payroll was committed to that degree, the whole company would have even more dynamism than before." "Of course,
some jobs do not easily render themselves to evaluations in quantitative
terms. People who are not directly involved in production or sales
may find it difficult to translate their performances into amounts
of money. But insofar as their work is necessary for every yen the
company earns. It should be possible to express their contribution
in monetary terms." "A sceptic
might say, 'I don't mind earning three or even five times my salary
if it helps my company grow and prosper, but why should I aim for
10 times when personally I get only a fraction in return?' As I
see it, this person needs to look at society from a much broader
perspective." "When
you are earning 10 times as much as your pay check, many other people,
perhaps millions of them, are similarly contributing to their enterprises
and to the national wealth. Just as the fruits of your labour are
distributed to other members of society in various forms, you, too,
benefit from other people's labour. The monetary value of that benefit,
both tangible and intangible, may well exceed your total contribution."
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