APPROACH TO RESTRUCTURING OF PUBLIC ENTERPRISES

6.1. In General

Section 4 has presented our general approach to privatization and public enterprise reform. Sub-section 4.4 discusses our methodology for classifying public enterprises. Based on that classification, some enterprises will be in need of restructuring. Many of those enterprises not suitable for immediate divestment will require restructuring. Priority should be given to the larger enterprises, as they can have the largest impact on Government.

The objective of restructuring should be to improve the economic efficiency of the enterprises. To achieve this goal, steps will have to be taken, where appropriate, to restructure enterprises, introduce more commercially orientated policies and practices and to anticipate the removal of Treasury support.

To achieve a restructuring, it is necessary to establish policies and procedures for:

  • introducing commercial business planning in enterprises
  • financial restructuring
  • management of Treasury support
  • improving information systems in enterprises
  • strengthening public enterprise sector supervision
  • introducing decentralized management
  • merging enterprises
  • liquidating non viable enterprises

6.2. Corporate Planning

Assistance in preparing corporate business plans in the larger enterprises (across all sectors) will be a crucial element in the process of commercialisation of those enterprises as well as justifying transitional Treasury support. Members of our proposed team have experience of training and developing corporate planning functions in enterprises as well as in detailed preparation of plans. We have a proven methodology which we would employ as the basis for developing guidelines for and delivering training to enterprises, ministries and the Executing Agency.

6.3. Financial Restructuring

Corporate planning will be important in designing appropriate capital structures for enterprises which are heavily indebted and/or which envisage major capital investment. Other preliminary work done to evaluate each enterprise (described in Section 4.1) will establish the necessary benchmark for the financial restructuring of each enterprise. Members of our team have all the relevant experience to be able to advise on the optimum capital structures and the financial instruments available. We would also provide training on the topic of capital structure for the Executing Agency and selected enterprise managers as a prelude to work in this area. This training will be particularly relevant to enterprises which will later be partially or fully privatized and/or which will be subject to keen competition.

6.4. Treasury Support

Some enterprises, notably those in the industrial sector, may have been the recipients of various forms of Treasury support. The Executing Agency has an important role in recommending the criteria for eligibility for support and the level of support granted. This role requires effective planning, and the design and implementing of an effective system for monitoring and controlling all types of Treasury direct and indirect support to commercial public enterprises. Priority attention is recommended to be paid to those enterprises which are financially distressed. Our approach would recommend linking this work with improvements in public enterprise corporate planning and information systems and the development of a database management system.

A key ingredient for success will be the establishment of close working relationships with Treasury, the banks, line ministries and the individual enterprises themselves.

6.5. Management Information Systems

We would aim to help development of management information systems ("MIS") in three areas:

  • first, and most importantly, the systems required by the Executing Agency to enable it to perform its duties effectively and efficiently.
  • second, at the ministry level: Our general experience is that enterprise monitoring systems in the line ministries are underdeveloped or non-existent. Whilst the Executing Agency will have an important role in monitoring and evaluation, the ministries will continue to need relevant data for policy planning and review purposes. There is therefore a need to coordinate these requirements with Executing Agency's own MIS; and
  • third, at the enterprise level: successful implementation of any MIS is predicated on the requisite data being available from the enterprises. Standard guidelines and reporting formats should be developed for use at the enterprise level, to determine training and implementation requirements and to draw up a comprehensive MIS technical assistance program for relevant enterprises.

6.6. Performance Contracts

Performance contracts provide a good way to implement commercial discipline in public enterprises. Experience has shown that satisfactory institutional arrangements are a prerequisite to the successful application of performance contracts. This tool of monitoring and control is very likely to become a standard feature for all major enterprises and certainly for those which provide non-commercial alongside commercial services. Based on our considerable experience in this area, our approach to developing the concept and use of performance contracts would be to examine and fulfil each of the requirements for success. These are set out in Attachment 8 together with our standard format of contract which we propose should be adopted. (See Attachment 9) We actually prefer to use the term "memorandum of agreement" in view of the non legal status of "performance contracts".

6.7. Decentralized Management

It is vitally important in the shift towards more market oriented enterprises that state enterprise management are freed to respond as effectively as possible to competition. It is also critically important that legal and procedural safeguards be introduced to protect state enterprises against undue Government intervention. In addition, the amount of freedom should increase as the level of industry competition and the skill sets of employees increase. We believe that a key success factor in the reform of public enterprise process, is the ability to establish a fine balance between necessary operational autonomy for the enterprise and accountability to the Government.

6.8. Merger of Enterprises

It is possible that in certain cases, an optimum situation may result from the merger of two or more enterprises. This can be done easily, as complex issues of valuation and goodwill, which normally complicate a merger, do not enter. The Government owns all the public enterprises and is free to merge Units or assets as it sees fit. The object of this option is to create maximum value for the Government. Once a successful merger was completed, the surviving enterprise could itself be privatized in one of the other ways described.

6.9. Liquidation

Some enterprises may simply be shut as fundamentally non viable. Rather than mothballing such enterprises (which brings no cash to the Government), all assets can be sold. In the case of certain assets (receivables), special arrangements may be made to collect, rather than selling them at a large discount to a buyer who may have less ability and leverage to collect than does the Government.

Assets will be sold in the local or international market, depending on circumstances. Mechanisms must be put in place to provide incentives to managers and officials charged with selling such assets to get the highest price possible. Possibilities of private advantage to the persons responsible for selling (for achieving a low sales price) must be eliminated. If necessary, international brokers or other third parties may be necessary to ensure that the Government gets the maximum possible for the assets sold. At the same time, care must be taken that assets sold do not disrupt the market by driving values of existing (struggling) enterprises down and by allowing new entrants into the market which could then compete with lower costs based on the assets purchased from the Government at "fire sale" prices.

In some cases, an orderly run down in order to achieve a closure, may be preferred to an immediate closure. This will require relevant receivership experience.

6.10. Supervision, Monitoring and Regulation of Restructured Enterprises

6.10.1. In General

Enterprise sector supervision needs to be developed (i) so that the Executing Agency has effective procedures for managing the restructuring component of the reform program; and (ii) in order to establish, for the longer term, an appropriate performance monitoring and evaluation system which balances the needs of the Executing Agency (or its successor central monitoring institution) and the line ministries with the internal systems in place in the enterprises.

Building Blocks
The key building blocks for developing and introducing effective supervision on which we propose to concentrate are:

  • MIS (as outlined above)
  • the institutional framework
  • performance contracts
  • the regulatory framework.
  • Institutional Arrangements

In our experience, determining the most appropriate institutional arrangements and making them work is crucial to effective supervision; it is also the most difficult task to undertake. Bearing this in mind, our approach would be to build on the working relationships already established between the Executing Agency, the holding companies and the line ministries, to help the ministries determine their monitoring and supervision requirements and then to deliver that which the ministries have, so far, been unable to secure themselves. We would advise on the available options for supervision arrangements (for example: ministries or a central agency responsible for enterprise supervision) including the linkages with interested line and non-line ministries.

This work is best carried out after the reform program has progressed and a clearer picture emerges of what the public enterprise sector will look like in, say, 5 years' time.

6.10.2. Supervision during Restructuring

The process of parastatal reform and restructuring can be a complex one. It can be a stressful and traumatic time for management and staff of the enterprise being restructured. Unlike privatization, bureaucracies and ministerial officials are less likely to be affected by a parastatal reform.

Close supervision during the period of restructuring is important. This supervision can be provided by the line ministry, a strong government restructuring unit or Board of Directors. Supervision is needed in a number of areas. The most important are discussed below.

  • Maintaining Orderly Business Practices
    During the process of restructuring, a high level of supervision is required to ensure that the enterprise continues to preform its normal commercial functions during this disruptive and potentially ambiguous period. Management must have a clear understanding of the enterprises objectives and goals during this period. Reporting lines (whether to a line ministry, a special privatization unit or a Board of Directors) must be clearly communicated and understood by senior and middle management.

  • Restructuring the Enterprise
    The process of restructuring can be accompanied by significant commercial activities and fundamental changes in the way business has traditionally been done. Assets are sold. Redundant staff are retrenched. Lines of business are closed or spun off. This often puts undue stress on a management structure unused to significant changes in business procedures. Supervision and guidance is necessary to ensure an orderly transition.

  • Preventing Abuses
    The period of restructuring can be ambiguous and may provide ample opportunity for abuse and personal gain. A mechanism should be put in place to guard against financial abuses and personal prerogative, which often mark the behaviour of public enterprises in ordinary times.

6.10.3. Supervision after Restructuring

After reform and restructuring, the enterprise should be subject to a high level of supervision to ensure that the commercial disciplines are maintained and that the traditional failures of parastatal ownership are avoided. Such supervision should be far reaching and might encompass the full range of financial accounting, marginal analysis, productivity and morale measures, management by objectives, and a complete and regular review of inputs, outputs and outcomes. The more effective this supervision is, the more efficient the reformed Public Enterprise will be.

6.10.4. Regulation of Restructured Public Enterprises

Certain enterprises operate in areas of natural or statutory monopoly. These may require an ongoing regulatory regime to protect the consumers. To the extent that competition can be and is encouraged, the need to regulate is minimised.

The experience of Admiralty International and associated individuals and firms in this area is extensive. It includes several statutory and natural monopolies, including telephone companies, electricity generating, distributing and retailing operations, airlines, natural gas and petroleum companies, commodities boards, post offices and public works departments and extensive discussions with the New Zealand Treasury relating to Electricorp, Airways Corporation, the nation's airports, hospitals and schools will provide a sophisticated background to approach these issues.

top