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Chapter - 1
Overview

Public enterprises in ASOSAI member and other regional countries have become important instruments in nation-building to carry out entrepreneurial func­tions associated with economic and social development. To some extent, public en­terprises have assumed a part role of the State in accelerating economic development and maintaining political stability where sole dependence upon ministerial de­partments to implement government programmes have proved to be ineffective.

The growth in number of these bodies has increased materially and this is reflected in their contribution to the Gross Domestic Product (GDP) of a number of countries. For example in Malaysia, at federal and state levels, prior to 1955 there were 11 such enterprises which now number over 1345. In the Philippines, the number has increased from 65 to 303 in the last 15 years. India at central and state levels has about 1701 enterprises and they play a dominant and pace setting role in the national economy. Israel has 300 public commercial enterprises employing about 5% of the country's workforce. Their exports contribute about 15% of Israel's total exports and in monetary terms their imports equalled about 20% of GDP. In Papua New Guinea, the workforce of 22,000 in public enterprises is only slightly less than half of the total employment in the public service. Their capital and operating expenses are the equivalent of 64% of the central governments direct actual expenditure. In Sri Lanka, the energy sector is solely in the hands of public enterprises and about 42% of the agriculture and plantations are similarly conducted, contributing about 35% to GDP. In China there are approximately 800,000 public enterprises employing about 60 million workers. Profits and taxes from these enter­prises constitute about 80% of the national revenues. These examples are by no means isolated as similar trends are discernible in many countries in the Asian region and elsewhere. An indication of the approximate number of public enterprises in the various countries is represented in Table 1.

Public enterprises are financed in a variety of ways. Generally, the initial investment capital is provided from the government as a launching grant. Thereaf­ter, the enterprise may receive annual grants for operating and development expenditure depending on the nature of the enterprise and its activities. Statutory corporations and government owned companies are generally expected to generate their own income and operate profitably, are allowed to raise loans on the domestic and foreign markets and in a number of cases offer equity participation to govern­ment and private sector agencies. Characteristically more companies are created to undertake commercial or semi-commercial activities of the State as it is generally assumed that these provide greater operational flexibility than is normally possible through the traditional departmental form.

CONCEPTS OF PUBLIC ENTERPRISES IN ASOSAI MEMBER COUNTRIES

In the Tokyo Declaration of Guidelines on Public Accountability (1985) the following public enterprises were recognised:

1. departmental undertakings,
2. statutory corporations or autonomous bodies established by or under legislation,
3. autonomous bodies set up by government resolution or order, and
4. companies, nationalised or established under company law, where government has a controlling interest.

Departmental Undertakings

These are entities which organisationally are part of ministerial departments but operate in a commercial manner. They come within ministerial jurisdiction, receive direct appropriations for capital and operational purposes from the legislature, keep their accounts on an accrual basis and are staffed and managed by civil servants. General examples are railways, postal services, government printers, water boards, mints and such like bodies which are service rather than profit motivated. In some ASOSAI countries these bodies may even be established instead as statutory corporations depending on the amount of flexibility that is desired in carrying out their tasks. In general this form of public enterprise is not a legal entity in its own right.

Statutory Corporations, Bodies or Authorities

Statutory bodies are organisations which are established by or under legislation with their structure, powers and functions specifically prescribed. They are separate legal entities and can sue and be sued. They have far more autonomy than departmental undertakings and can in many cases invest, raise capital, borrow and lend within the terms of their statutes. Harbour boards, airlines, telecommunica­tions, energy and banks are general examples. In this study, some countries have made a distinction between bodies established by separate laws which are labelled statutory corporations or statutory authorities and those established under omnibus legislation which are referred to as autonomous bodies. Whilst there may be some differences in autonomy and the powers they wield, these autonomous bodies should not be confused with the autonomous bodies established by government resolutions or orders.

Autonomous bodies established by Government Resolution or Order

These types of bodies are rare. They may be established by government order or Royal Decree for a public purpose. Examples of such entities are found in Thailand such as the National Housing Authority and the Bangkok Mass Transit Authority. In India they take the form of registered societies (under the Societies Registration Act) which receive government financial backing. Their powers and functions are as specified in the resolution or order establishing them.

Government Companies

These are bodies established under company law. They differ from other companies in as much as the State and/or public corporations hold the majority or all of their shares. Where equity in these companies is held jointly by public and private interests, they are generally referred to as 'mixed enterprises' or 'joint venture' companies.

RATIONALE OF PUBLIC ENTERPRISES

There are two qualitative dimensions to a public enterprise viz the 'public' and the 'enterprise' aspects. The 'public' aspect of the two dimensional concept envisages that an entity must serve a public purpose such as promoting industrial expansion, ensuring balanced regional development, and/or generally raising living standards. The 'enterprise' aspect connotes that the entity must function as a commercial organisation trying to achieve the normal commercial objectives ex­pected of such a body. The weightage given to either dimension will determine whether the enterprise will operate in the nature of a nonprofit service organisation or a profit-orientated company.

In the ASOSAI Second Assembly and First International Seminar held in Seoul, Korea (1982) a paper presented on "State Audit Systems for Economic Develop­ment" outlined the phases of economic development which, theoretically at least, the various ASOSAI countries had reached or would experience. It referred to a first stage of 'maintenance' where production functions were limited and based on less advanced science and technology. In the second stage of 'mobilisation' the government mobilises society towards a 'take off' providing incentives for industrial expansion by providing access to raw materials, education and protective trade policies so that there is a commitment towards modernisation and industrial development. The third stage is one of 'guidance' of the economy in which modern technology and long range planning is prevalent with rapid urbanisation and changing class structures. The last stage is one of 'co-ordination' when the economy reaches the mature stage of a welfare oriented industrial society. At this stage the government tries to adopt a regulatory role co-ordinating the various aspects of the private sector in order to achieve the most equitable distribution of wealth and services. Member countries of ASOSAI are at various stages of development and generally fall within the stages of development described above. This is reflected in the types of enterprises that are established in each country; the diverse rationale postulated for establishing them, and the wide range of their activities. Arguably, when countries reach the 'mature' stage the goverments concerned, depending on their political philosophies, begin to think in terms of privatising their enterprises, partly because they have become a burden on public coffers and/or because such enterprises are capable of functioning as private sector entities and still serve the public interests.

Public enterprises in ASOSAI countries grew out of necessity or were developed for political, economic, social and historical reasons. Governments had to fuel the engines of growth in the economy and had to provide the vehicles for achieving this purpose. There was a need to promote self-reliance in strategic sectors of the economy, provide infrastructural facilities for promoting a balanced and diversified economic structure in development, reduce racial and regional disparities, increase employment, bridge the gap in the investment participation as between the public and private sectors in the country and generate surpluses for reinvestment; also to enforce State control on trade and industry by ensuring an equitable distribution of goods and services. There was, in addition, a desire for creating prestigious or research-oriented institutions for discharging specialised functions. Further, it was also recognised that there was a need to bring outside expertise into management of the activity in ways which were not otherwise practicable in a departmental setting. It was also incumbent on governments to venture into and fill the void in those areas where the private sector was not prepared to invest. Governments also felt it necessary to intervene in those areas which they considered were being run inefficiently by the private sector. In some other cases entities which were poorly managed and required rehabilitation or the nature of the undertakings involved the public interest, 'nationalisation' or government take-over was warranted so as to prevent exploitation by the private sector. There were also certain types of enterprises, such as defence-oriented industries, which could not be left to the private sector for reasons of national security. Tied in with all these reasons was the desire to create infrastructural facilities to encourage economic growth by attracting domestic and foreign capital. In some situations there was a tendency to establish, 'mixed enterprises' or joint ventures with the private sector. There were additional 'spin offs' in this type of arrangement in that it facilitated transfer of technology, expertise and skills from the private sector to the public sector.

Most public enterprises in the ASOSAI region can be further classified according to sectoral or functional types including: public utilities, transport and communica­tions, food and agriculture, development finance institutions, industrial, trading, manufacturing, regional development, oil, coal and gas and heavy engineering. In the various countries they may be grouped differently depending on how ministerial functions which determine ministerial responsibility, are allocated for particular enterprises. The number of enterprises within each sector may indicate the importance and priority each country places on these bodies for carrying out its policies, development plans and objectives. In Korea for example, there are more development finance institutions ie banks, insurance companies and the stock exchange, than any other types of public enterprise. In India on the other hand, commercial, manufacturing and industrial types predominate. In Malaysia the regional development and agricultural sectors are prominent reflecting the impor­tance given to agricultural based industries and a commitment to improve the welfare of the rural population.

The range of activities is marked, touching on all aspects of the economy from the provision of basic amenities such as water and electricity, to tourist promotion, the management of ports, railways and airlines, to atomic energy. Public enterprises such as the manufacturing and industrial types are actively involved in production whilst other agencies such as development finance institutions, like banks and insurance companies, perform supportive functions providing technical and finan­cial assistance to promote the development of both public and private enterprises. Many statutory corporations and companies have also established subsidiary companies to support their activities. For example, a housing authority may set up a construction company, a credit corporation and a cement factory help achieve its objectives. This sort of development has led to the creation of numerous subsidiary companies, many of which may provide similar services and perform overlapping functions. This proliferation of subsidiaries has resulted in a dilution of available expertise in those developing countries where staff are drawn from the public service. Of greater importance and concern however, is the potential for the weakening of controls exercised by the legislature and the executive over these bodies to the detriment of public accountability.

LEGISLATURAL AND GOVERNMENTAL CONTROLS

Public enterprises in the ASOSAI countries, other than the departmental form, generally enjoy considerable autonomy but they nevertheless are subject to legis-latural and governmental controls because in many cases their funds are derived from the State. They are, then, publicly accountable. The nature and extent of controls vary between countries depending on the form and type of the enterprises and in some cases the extent of the investment. These controls are exercised directly by supervision and inspection, through committees of the legislature and institutions such as the SAI, or indirectly through government surveillance of performance. Generally, government controls over their policies, management and operations can be represented diagrammatically as follows:

Diagram - 1
Forms of Government Control Over Public Enterprises

The main instruments of legislatural controls in many of the ASOSAI countries are the budget debates, questions in the legislature, the annual accounts and reports of the enterprises tabled in the legislature, reports by the SAIs and examination by legislatural committees. The power of the government to exercise control stems primarily from the enabling statutes. Governments also supervise and control these bodies by ensuring that they comply with laws, rules and regulations issued by them and enforced by the central agencies such as the Treasury and public service personnel authorities. Controls are also exercised through pricing, lending and borrowing policies of the government. It is normal for most governments to appoint the boards of directors and also the chief executives. Apart from these organisational controls, procedural controls also exist. Systems for reporting on a regular basis and periodical review meetings between the Minister concerned and the managements of public enterprises are common. The SAIs discharge a different responsibility by sustaining public accountability through their annual and special reports.

Governments are conscious of maintaining a proper balance between autonomy and control. Excessive controls could be counter productive to the very purpose of establishing an enterprise whilst on the other hand, too much autonomy could put public funds at risk in the event of poor management. Although comprehensive legislatural and governmental controls exist, in practice some SAIs have found them to be ineffective. There is often a lack of performance criteria and properly developed monitoring and evaluation systems, compounded by a shortage of adequately trained staff in the enterprise to ensure compliance with prescribed procedures. This perceived weakness could put at risk public accountability and thus increase the burden of public enterprises on government budgets.

PUBLIC ACCOUNTABILITY AND STATE AUDITING

The Tokyo Declaration of Guidelines on Public Accountability defines public ac­countability as "the obligations of persons/authorities entrusted with public re­sources to report on the management of such resources and be answerable for the fiscal, managerial and programme responsibilities that are conferred." The external audit through the SAI is the most important and vital link in the process for determining such accountability.

The need for modern accounting systems and auditing practices in government has probably never been greater or more apparent than in recent times. Govern­ments through their agencies and instrumentalities operate some of the largest and most complex business and service entities as evidenced amongst member coun­tries. Many of these entities do not operate in a complete commercial environment and the traditional commercial bottom line 'profit and loss measures' are not always relevant as a guide to efficiency. Their performance cannot entirely be judged against the back-drop of financial results using criteria of financial viability such as net profitability or the rate of return on capital employed.

The role of the State audit system has to be continuously adjusted to the ever expanding tasks required of it as the country's economy moves along to higher stages of development. In response to these changes a number of the member countries has shifted to comprehensive audits covering considerations of economy, and efficiency, or, as has been described in the General Statement of Twelfth INCOSAI, performance audits.

Nonetheless, in a number of ASOSAI member countries, the main thrust of audit is still on financial and compliance audit. In so far as economy and efficiency audits are concerned these vary over a wide spectrum, in terms of scope, extent, methods and areas of audit concern. Thus at one end of the scale extensive performance audits are carried out by countries such as the Republic of Korea, Japan, Israel, Australia and India and at the other extreme there are some member countries where the SAIs have not yet embarked on performance audits to any great extent.

Systems evaluation is commonly conducted and wherever possible transac­tions testing on a sampling basis is carried out. The extent of testing varies depending upon a detailed assessment of the system of internal controls.

As regards performance auditing, the approach and methods employed vary amongst the different SAIs depending on the expertise, availability of qualified staff and the state of financial and other records of the public enterprises audited and their activities.

An important function of SAIs is not only to attest the financial statements of public enterprises but also to assist the government and the enterprise management to improve financial and administrative efficiency and performance. In this context, the emphasis throughout the audit process is to serve as instruments of both accountability and improved public administration. Audit findings and reports thus not only express opinions on the financial statements but also include comments on the propriety of transactions, management decisions, waste and extravagance. Thus, not only are the results and operations of public enterprises evaluated but suggestions are also given for corrective actions and improvements.

However, SAIs experience difficulty in evaluating the performance of public enterprises where the objectives of the enterprises are not clearly specified, or where multiple objectives are involved and there is no priority ranking to determine which objective takes precedence. It has been the experience of SAIs that, more often than not, the social and economic objectives are not expressed in such detail as to serve as performance indicators, nor are the standards of performance specified by the authorities approving the socio-economic development programmes.

To carry out the performance audit effectively, the SAI has to remain abreast of developments in different fields of human knowledge and develop the vision and the intuitive flair for a creative evaluation of performance against the overall framework of national objectives and policy. This requires constant thought and conscious efforts to improve the technical skills of the audit personnel at all levels. Many member countries have expressed that lack of experienced and multidisciplined staff is a major constraint in development of this important area of audit.

Table 2 summarises the mandate for audit of public enterprises by the SAIs. Audit arrangements in a number of member countries include provision for three levels of audit viz: internal audit, external audit carried out by commercial account­ants appointed by the government on the advice of the SAI or by the SAI direct, and finally by the SAI itself. In discharging its responsibility to the legislature, the SAI reviews and comments on the performance of both internal auditors and the commercial auditor.

SAI Reports to the Legislature

The general practice is for the SAI to present both annual and special reports to the legislature in the interests of public accountability. It has been noted, however, that in some countries this is not the procedure in respect of government- owned companies not subject to SAI audit either as appointed external auditor or in the exercise of powers to review the audit carried out by the commercial auditor. This is a perceived weakness in the accountability process.

The process adopted by most legislatures is for SAI reports to be reviewed by a committee such as a Public Accounts Committee. Depending on practices followed as between the government and the legislature which vary as between countries, action is taken to correct deficiencies and weaknesses raised by the SAI.

#    At Federal level ie enterprises of the State governments are excluded.
*    Unclassified.
+   There are 1,133 companies but only 847 are considered active:

Table - 2
Mandate for Audit of Pubic Enterprises