The development of public enterprises in Pakistan broadly related to two periods-(i) Pre-1972 and (ii) post-1972. The Pre-1972 period is known for growth of public enterprises on pragmatic considerations of providing the infrastructure for development and of supplementing the efforts of private sector. The post-1972 period was marked by a large scale nationalisation based on political and social considerations which greatly expanded the size and scope of public sector. The investment in public enterprises assumed huge proportions and their range and diversity widened immensely. The Government was, therefore, rightly concerned about their efficiency and effectiveness. It was accordingly decided in 1977 that a full assessment of the performance of public sector commercial enterprises would be conducted by the Auditor General's Department. It was hoped that such assessment, analysis and evaluation will not only ensure greater accountability but will also help in the formulation of sound policies to improve the performance of this increasingly important sector.
Performance evaluation has very little in common with the usual professional activity of auditing which adopts a static and limited view. Performance evaluation on the other hand takes a dynamic and comprehensive view of the enterprise, its environment, resources, goals, activities and achievements. The Auditor General's Department was not fully geared to undertake the new task assigned to its Performance Evaluation Cell. It was decided, in the circumstances, to begin the work by drafting a few promising officers with good academic background in business discipline. Officers possessing analytical ability, objectivity, tactfulness and creativity were selected and exposed to a short three-month training course to re-orient them to the demands of their new assignment. Experts for training purposes and for subsequent on-the-job guidance were brought in by courtesy of the Government of the Netherlands under the Dutch Technical Assistance Programme.
The performance evaluation studies were initiated by the Cell in January 1979. The methodology used was aimed at identification of strengths and weaknesses of a public enterprise so as to reach an informed opinion on the soundness of its operations and to recommend timely, meaningful and practical correctives to enable the management to effect improvements.
Performance evaluation studies conducted by the Cell mostly concerned industrial units. Evaluation of an industrial enterprise covered a detailed examination of its major operational areas e.g. finance, production, marketing, purchases, personnel, management systems, planning, etc. A brief description of the techniques used is given below:
Financial data over the past four or five years constitutes the principal source of information for assessment of a company's financial performance. A comprehensive income statement with an itemised breakdown of various elements of cost of production and operating expenses, expressed in terms of percentage of sales, is drawn for the selected period, to obtain a first impression of the state of the company's activities. This also enables the evaluator to identify the areas where bottlenecks exist. This is followed by a detailed analysis of the major elements of cost of production. Such an analysis includes a comparison of quantitative consumption of inputs, utilities, stores, etc, with the standards/norms where determined and/or budgeted provisions. A horizontal comparison is made in cases where no reliable standards/norms are available. Reasons for variances are examined for suitable comments in the report.
The state of a company's health is also viewed in the context of the well-known indicators like current, quick and debt-equity ratios. Profitability is judged by yardsticks like rates of return on investment/ capital employed. Break even analysis is also relevant, particularly in the case of a losing unit with a view to determining its economic viability within the limits of its production capacity, marketing capability and of the nature of its cost structure.
Optimum utilisation of the available production capacities, efficient operation of production facilities, economical use of inputs, utilites, stores and spares, etc., effective organisation and control of production process are indicative of a satisfactory production performance Examination of short-falls in these areas receive special attention of the evaluator.
A simple but an all-important indicator of the marketing performance of a company is its ability or otherwise to market its products at a reasonable margin of profit. The marketing function of a company is of vital importance since the survival of the organisation depends to a large extent upon how well it is able to adapt to the fluctuation of the market conditions caused by external factors, mainly action on the part of competitors and clients. Sale-trends over a period of time and product-wise marketability and profitability are examined. Sales promotion policy and its adequacy and effectiveness vis-a-vis the company's competitors are also reviewed. Constraints like governmental control over sales-price, distribution limitation, etc. in which a unit is operating are given due weight age while formulating an opinion about its performance.
Money is an important resource at the disposal of a company's management. Evaluation of the purchasing function mainly consists in seeing that purchases, besides being made according to the laid down procedures, were actually necessitated by operational requirements. Levels of consumption of various items and of their available stocks are compared over a period of time, to ascertain that the company's purchase policy is consumption-oriented and that purchases are planned in a manner as would not only ensure that production is not affected because of nonavailability of one or other item but will also eliminate over-purchasing causing unnecessary blockade of funds.
Efficient utilisation of the available personnel is indicated by the productivity rates over a period of time. The other relevant aspects of evaluation are organisational structure, personnel motivation, training plans, policies, rates of turnover and absenteeism, etc. This is another area in which government policies play an important role and the evaluator has to keep them in view while framing an opinion in the matter.
Management systems: An enterprise's resources are commonly classified in four categories: men, money, machines and materials The success of an enterprise largely depends on efficient, economic and effective utilisation of the available resources. In other words, avoidance of their wasteful and extravagant use is synonymous to good management. Evaluation in this area generally centres around this principle. Management systems and managerial tools such as internal control, budget fore-casting, internal information systems, internal audit, etc. are also reviewed to ascertain their adequacy and effectiveness.
Feasibilities for setting up the projects are examined to see if these were prepared with reasonable care in terms of costs and benefits. Since an evaluation study is generally made after a project has been in operation for two or three years, it is easy to see how the fore-casts and projections made in feasibilities compare with the actual performance and how a particular decision taken at the planning stage looks in retrospect.
Up to June, 1985, as many as fifty-eight evaluation reports has been issued covering a cross-section of enterprised engaged in the manufacture of vegetable ghee, fertilisers, chemicals and pesticides, sugar, carbon-black, cigarettes, matches, mild steel re-rolled products, trailors, trailors, tractors, domestic appliances, antibiotics, etc. A survey of the evaluation reports indicates wastage of resources through idle capacity, excessive inventories and lower productivity. Managerial inadequacy was at the core of the problems faced by public enterprises. Shortcomings were in evidence at the stage of planning, implementation and operation of enterprises. Some instances of planning and managerial failures are as under:
A sugar mill where the main product was in demand located its factory in an area of insufficient sugarcane supply. This led to below-capacity operations since its inception in 1965, resulting in accumulated loss of over Rs. 123 million at the end of 1982-83. The factory had since been disinvested, which was also a major recommendation of the Auditor General.
Another sugar mill was also similarly located and had accumulated a loss of about Rs. 62 million during an operating period of 8 years ended June. 30,1983. An opposite instance was the new Baker's Yeast plant which had access to the required inputs, but production was stranded due to an absence of market demand for the product, a constraint which was apparent earlier, but was ignored.
A china clay project was developed on the declared premise that the clay was first grade material which could be used in an allied ceramics complex. The clay was subsequently graded poor by the user with the result that the feasibility of the china clay project became adverse due to lack of off-take by the ceramics complex, and the latter became an import-oriented project with increased production costs.
A feature of two other units reviewed was that both were capital-intensive. The objectives of the corporation related to assisting the underdeveloped areas by such means as opening up job-opportunities for local inhabitants. The fulfillment of such a charter would rather seem to require the selection of labour-intensive industries. This consideration would be further strengthened by the fact that finding technological support for highly mechanised units, in terms of spare parts, maintenance personnel, etc. would be hard to come by in the backward areas concerned. This led to the question whether the strategy used by the corporation in selection of industries and industrial processes was optimally in line with the corporation's socio-economic objectives.
A pesticides unit suffered on account of inability for diversification of production towards alternative formulations in the face of reports that their product, DDT, had lost anti-mosquito effectiveness, and due to competition by well-marketed imported alternatives for agricultural use.
Review of purchase practices and procedures did not always lead to the assurance that purchases were made of specified goods at the most economical rates and in economical quantities. Only a few suppliers enjoyed a monopoly for local purchases in some units. There were positive indications of inferior materials in some units.
A tendency to go in for excessive purchases, including purchases of spares and stores was frequently in evidence. A usual consequence was stock-piling of inventories which ultimately became redundant. Problems of dead inventories were especially noticeable in some cement and fertilizer units.
Inability to market the main product in a competitive selling situation was a recurrent feature. This could in many cases be attributed to lack of adequate managerial competence. A unit suffered on this account not only due to an intrinsic fall of demand for their product, but also due to managerial failures in maintenance of quality and orientation of production in line with consumer requirements. The position improved subsequently with a change in top management during the post-evaluation period. In another corporation marketing personnel were neither adequately qualified nor trained and failure in the crucial marketing area was one of the key factors in the undoing of the organisation.
A woolen mills dealing in fashion fabrics was also finding it difficult to market its products in a highly competitive market and had piled up an inventory of over Rs 27 million as on June 30,1983 which was more than its average annual sales, which were about Rs 18 million over the two preceding years. The capacity-utilisation of another unit producing air-conditioners and refrigerators was substantially restricted because of a limited share of its products in the market. Antibiotics was yet another company which had suffered badly on account of its inability to sell its product in competition with other vialers in the country who used cheaper imported penicillin as a part of their input. It had consequently accumulated unsold inventory of about Rs. 11 million as on June 30, 1984.
Personnel policies for top and middle level management appeared to be undefined or unstable. A trading corporation went in for indiscriminate expansion followed by massive closures of shops and staff retrenchments. An important element in the corporation's financial failure was an excess of the overhead costs, which included personnel costs. Some units were subjected to rapid turnover of top managers which affected developement of long-term business policies. Two out of the four steel units reviewed were faced rather severely with this kind of constraint. Inadequacy of qualifications amongst key personnel appeared also to be a shortcoming in several units. Familiarity with even basic managerial techniques was sometimes lacking.
Internal control systems and procedures within units tended to be poor. Managerial tools such as budget fore-casting in financial and production terms tended to be unrealistic, or the estimates were not subsequently used for control purposes. Internal information systems were frequently inadequate. Internal audits appeared ineffective.
Public enterprises are established for the achievement of purposes which are usually multi-dimensional in character. These can be classified broadly as commercial (financial surplus, production output etc.) and non commercial or social (increasing employment, imparting skills, improving income distribution, stabilising prices, providing public services, developing backward regions, etc). The combination of the two types of objectives is often complicated especially when they are in conflict with each other at the point of realization. The basic problem with the appraisal of public enterprises arises out of the expectation that they should generate financial surpluses and at the same time conform to the policy constraints in the socio-political field. Financial and physical performance can be measured but the problem lies in the area of arriving at an adequate measurement of social goals. Some of these can perhaps be quantified but others defy attempts at satisfactory quantification and complications are introduced when considerations of quality enter the picture. This is the main problem being faced by the Cell and we are trying to tackle it. Guidance from other countries which could help us in devising a methodology for measuring the achievement of social obligation of an enterprise and for interlinking the sets of criteria to assess financial, productive and social performance to produce a composite indicator of performance of a public enterprise as a whole, is also being sought.
Performance evaluation of public enterprises is a new but an interesting field and requires creativity and innovation. In view of the" phenomenal growth of public investment in them, it goes without saying that it is a must. It not only seeks to ensure the desired degree of accountability but also helps the management in taking timely corrective action and aids the government which is concerned mainly with the efficient utilisation of its scarce resources.