Friday, 24 October 2014

A burden on Society: Inefficient Public Enterprises

“Government produces lamest products, infrastructures, and services! Government should do nothing but the work it has been assigned, governance.” Victor quipped.
He added further, “Private sector gives superior quality of services, which government never will be able to match in its lifetime.”
 “Well, remember what happens to the employees when a government undertaking is privatised. British train, when privatised on insistence of Margaret Thatcher, shed 100,000 jobs since it was privatised.” I tried to pacify my friend by putting up the counter argument in favour Government.
Campaign against privatisation of Royal Mail
“Those employees were burden on the tax payers. I was paying for their inefficient services, which were bought out by us because we had no other options at our disposal.” Generally, intellectually sterile Victor was on a roll today.
This short conversation made me think about the utility of government, in producing goods and providing services. All around the world governments have sweat profusely to manage public enterprises. Many public enterprises have been privatised by government for various reasons.The natural monopoly firms, such as Royal Mail, British Rail etc. of the Great Briton, are prime examples of the privatization. The prevalent sentiment   across the globe about privatization was, initially, downbeat. Citizens thought that government is privatising the assets only because government couldn’t nail those enterprises. On the contrary there were many examples of “rock star public enterprises” being privatised due to financial distress faced by government. Take cue from India’s privatisation drive, along with loss making and socially redundant enterprises like; Modern Food Industries (Such an ironic name) India also privatised Maruti Udyog (Now considered a top player in Indian automobile industry).    
Lack of innovations and incentives to reduce the costs are few critical reasons behind public enterprise’s dismal performance compared to private enterprises. Private sector looks for greater efficiency to reduce cost, without sacrificing, specified, minimum quality standards. Modern food industries was a government undertaking (Indian Government), engaged in producing fruit concentrates and bakery items. Founded in 1965, Modern food industries limited (Initially known as Modern Bakeries) marvelled in preparing recipes for business disasters (pun intended).  MFIL had no incentives to run the operations efficiently as profit maximization was put last on the list of Indian government. MFIL opened mango pulp producing plant in Bhagalpur-India. The location was chosen to decrease unemployment in Bhagalpur region. Interestingly, Bhagalpur was nowhere near to mango orchards. Entire plant became economically, a disaster due to increased transportation cost. This was one of many defunct plants opened by MFIL.
Modern food Industries strategic mistakes made many plants unprofitable
All the production facilities of MFIL were underutilised, excessive labour force with extremely low productivity, and lack of decision making paralysed MFIL adversely. Dissecting the failure of MFIL, one can derive that government enterprises’ lack of incentives to reduce costs and achieve efficiency was one of the prime reason behind MFIL’s under performance. Government wished to generate employment for youth through this venture but all it created was a glut of inefficient workforce, which put up burden on the tax payers. Government would be better off if it would have announced the tax rebates, equivalent to the investment made in MFIL, to private enterprises.
Government employees, running public enterprises, do not have innovative edge over their private sector counterparts. Government doesn’t have incentive system linked with performance of employees. In absence of such performance evaluation system government employees opt to free ride. Thus enterprises like MFIL has large chunk of “good for nothing” workforce and efficient and hardworking employees become minority.
Success breeds through two phenomenons, namely, motivation and threat. Management uses, popularly known as, carrot and/or stick method to align workforce’s objectives with enterprise’s growth plan. Workers not working ardently in tandem with enterprise’s goal, always face a situation where management may use the stick of wage cut, demotion, or pink slips to punish such ineffective or unruly workers. Public enterprises don’t have such a stick, which can be used with their will, in their hand. This creates a monopolistic situation for workers, who can choose between working and shirking. In absence of performance linked reward system, workers find more utility in shirking than in working. Workers decided how much output they would produce for their principals and clients as their principal doesn’t hold any stick to punish their agents/workers. MFIL faced such an excruciating situation before privatization. MFIL was marred with the issues described above and unfortunately MFIL was doing business in highly competitive industry, where margins were quite low and firms stay profitable due to their innovativeness and efficiency, both of which are absent at MFIL.
MFIL's Logo having lion as a mascot
Public enterprise’s emphasize on social welfare, alienate such pubic ventures from building reputation in the market. Unless, an enterprise builds reputation in the market, its product remains a commodity rather than being a brand in such a competitive industry. MFIL, completely lacked, such competitive edge to build its reputation in the market.
Ultimately, MFIL was privatised under Indian government’s privatization programme. The transaction announced on March 1, 2006 made MFIL a subsidiary of Hindustan Unilever. After taking over, Unilever management infused slew of measures to cut the costs by chopping of unproductive plants and processes. Unilever introduced PLR (performance linked reward) system to motivate efficient workers/agents.

Time will tell, whether Unilever made smart bet  on MFIL but one can surely conclude that by offloading MFIL government has certainly reduced social cost and enable tax payers to get rid of money sucking enterprise.

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