The emergence of public enterprises (PEs) in the less Developed Countries (LDCs) has coincided with initial stages of industrialization and modern economic development. Another historical factor which led to the growth of PEs in LDCs, besides ideological conviction in some LDCs, is that PEs represent the beginnings of national development efforts following independence (Ramanadham, 1984 Musa, 1991).
Therefore, for more than three decades, PEs have been a major institution and a vehicle for economic development in LDCs. But the early 1980s, however, a host of exogenous and endogenous factors had emerged to constrain the previous subsidization by the exchequer (Luke, 1988). The loss-making PEs were perceived as a burden on the public treasury. Chastened by the public finance crisis and pressurized by the International Monetary Fund (IMF) and the World Bank, most LDC governments have shown willingness to make fundamental reforms, including privatization, as part of structural adjustment loan agreements with the World Bank (Aylen, 1987, Luke, 1988, Nellis and Kikeri, 1989). Since then, privatization has become one of the dominant themes of public policy throughout the world (Heald, 1985). Some scholars even urge LDCs to privatize (Young, 1985) while others maintain that privatization is the only cure for the ills of the economies of LDCs (Boghilal, 1985).
In Sudan, the government had privatized the public vegetable oil processing industry in 1982 by selling 51 percent of shares to a private investment authority. At the same time, a number of PEs have been offered for sale. In the public sugar companies, the government had embarked on a six-year rehabilitation programme which had started in mid 1986. The objective was to improve their financial performance and privatize them eventually. Subsequent governments had reserved this policy and decided to keep the public sugar companies within the government domain. This is because sugar is considered as a strategic commodity in the Sudan. The privatization policy continues during the 1990s as a major feature of the Three-year Economic Salvation Programme 1990/93. To date, a number of PEs have been privatized in Sudan, wholly or partially, in different industries.
Besides other motives, privatization of PEs has been triggered by the claim that PEs are less efficient than their counterparts in the private sector (Pryke, 1982, Boghilal, 1985, Hemming and Mansoor, 1985, Heald, 1985, Young, 1986, Kay and Thompson, 1986, Iyer, 1988, Nellis and Kikeri, 1989). Despite this, however, there is no empirical evidence to support or refute this argument (Heald, 1985, Tomkins, 1986). Very few empirical studies have been conducted to confirm or disconfirm the efficiency argument along the public-private ownership dimension. To add to the difficulty, such evidence that does exist is confusing. In Britain, Pryke (1971 and 1981) studied UK nationalized industries for the period 1958-1968 and concluded that they were more productive than they would be in the private sector. He then studied the period 1968-1978 and came to the opposite conclusion. In LDCs, on the other hand, a literature survey by Nellis and Kikeri (1989) concluded that, "More rigorous, efficiency-oriented comparisons are lacking". Similarly, a recent literature review confirms "the need for comparative research specifically addressing the African situation, because literature focusing specifically on Africa is scarce." (IDRC, 1992).
This literature review suggests that very few empirical studies have been conducted to confirm or disconfirm the claim that private enterprises outperform public enterprises. This study, therefore, aims at narrowing this literature gap. Specifically speaking, the study will endeavour to address the following question:
Does the private enterprise in the Sudanese sugar industry outperform its counterparts in the public sector?
To answer this research question, we will concentrate on the sugar industry. The selection of the sugar industry is based on the following three criteria:
i The sugar industry is a well-established one during the 1960s two public sugar producing plants were established in the country-with the growing domestic demand for sugar, the government commenced the planning for a large expansion in sugar production in the early 1970s.
ii existence of public and private enterprises within the sugar industry. This facilitates comparison of their performance along the public-private ownership dimension. Here, the definition of a PE has to be made to avoid unnecessary ambiguity. A PE is the one in which the government owns 51% or more, of its shares, the one which is supposed to earn most of its revenues from the sale of goods or services and which is self-accounting and has a separate legal entity. This definition, which is used world-wide, is accepted and used to differentiate public and private companies in Sudan.
iii importance of the sugar industry to the Sudanese economy in terms of contribution to the GDP (though small), employment and import substitution.
On the basis of the criterion set in (ii) above, the following four public sugar companies-100% owned by the government - will be selected for this study:
- Guneid Sugar Company (GSC).
- New Halfa Sugar Company (NHSC).
- Assalaya Sugar Company (ASC).
- Sennar Sugar Company (SSC).
Kenana Sugar Company (KSC), on the other hand, is selected to represent the private sector. In fact, it is the sole private sugar company that exists. KSC is a joint venture in which the Sudan Government owns 35.17% of its share. Hence, in this sense, it is considered as a private company, though not pure private. The rest is owned by foreign investors including Kuwait Investment Authority (30.50%), Government of the Kingdom of Saudi Arabia (10.92%), The Arab Investment Company (6.96%), Sudan Development Corporation (5.66%), The Arab Authority for Agricultural Investment and Development (5.56%), Consortium of Sudanese Commercial Banks (4.45%), Lonrho PLC (0.46%), Nissho Iwai Corporation (0.16%) and Gulf Fisheries Company (0.16%).
Having selected the industry and the companies participating in this study, the next methodological issue which arises is measurement of performance along the public-private ownership dichotomy. Identification of the appropriate performance indicators for PEs in LDCs has always been difficult and cotroversia (Chambers, 1983, Woodward, 1986, Powell, 1987, Trivedi, 1988, Bennet, 1988, Shaikh, 1990). To add to the problem, it is difficult to compare "like with like" in the Sudanese Sugar industry. This is because the companies in the sugar industry may differ in terms of their size and technology, which in turn affect their performance.
The return on investment (ROI) will be used as an indicator for performance comparison in the public and private sugar companies. The ROI is calculated through dividing the after tax net profit by the total assets of the company for a particular financial year. This indicator measures the enterprise's ability to generate commercial profit through use of its total assets. The use of commercial profitability to compare performance of public and private enterprises in the sugar industry has to be interpreted with caution, however. One reason for this is that high commercial profitability (ROI) does not necessarily indicate good performance (efficiency). Enterprises may be inefficient and at the same time make profits. This is particularly true in Sudan where the ex-factory price of goods/services produced/rendered by the private enterprises is based on the actual (rather than standard) costs per unit of output plus a guaranteed profit-margin of upto 25 percent. Moreover, the use of commercial profitability for public and private enterprise evaluation has been criticized as unsatisfactory. The obvious argument for this is that PEs in LDCs are established to achieve multiple objectives other than profit-making whereas private enterprises pursue basically commercial objectives (Kay and Thompson, 1986, Turk, 1984, Jones and Papanek, 1983, Tomlison, 1986).
To overcome these problems, two approaches will be used. First, three more performance indicators will be used to supplement the ROI. These will include:
i Cost per unit of outputs (i.e cost/metric ton of sugar): this ratio relates total actual production costs (inputs) to the total production (output) per year. Lower cost per metric ton of sugar indicates good performance (efficiency).
ii capacity utilization: this indicator is calculated by relating the actual production to the designed (theoretical) capacity of the enterprise per year. High capacity utilization rate indicates good performance.
iii average labour productivity (partial productivity): this indicator is calculated by relating the total actual production per year to the total permanent workforce of the company during that year. Again, high average labour productivity is a sign of good performance (efficiency).
Second, "Another approach to the issue of relative efficiency of public and private enterprises is to look at the reasons given as to why private is generally said to be more efficient" (Tomlison, 1986). Therefore, we will investigate the factors which have been suggested by literature and which may have contributed to the poor performance of PEs vis a vis private enterprises (Musa, 1987, Luke, 1988). These will include government control, pursuit of socio-political goals, poor management information systems and shortage of production inputs.
Table 1 shows the ROI for the five sugar companies. A quick look at the table shows that almost all the four PEs have made a significant negative ROI for most of the period under investigation, particularly 1980/81-1985/86. KSC, on the other hand, except for two years, have shown positive ROI. This suggests that the private firm has consistently been more profitable than PEs.
Table 1: Return on Investment (ROI) in the Public and Private Sugar Companies
Ownership |
Company |
Return on Investment (ROI) for the year | ||||||||
|
|
80/81 |
81/82 |
82/83 |
83/84 |
84/85 |
85/86 |
86/87 |
87/88 |
88/89 |
Public |
GSC |
(32) |
(49) |
(60) |
(32) |
(23) |
(29) |
(41) |
(40) |
(62) |
|
NHSC |
(35) |
(30) |
(40) |
(20) |
17 |
(5) |
2 |
(9) |
NA* |
|
ASC |
(20) |
(32) |
(26) |
(9) |
(5) |
(10) |
(7) |
NA |
(2) |
|
SSC |
(33) |
(12) |
(22) |
(.009) |
(11) |
(9) |
(.009) |
11 |
9 |
Private |
KSC |
(2) |
.004 |
(5) |
(3) |
.002 |
57 |
14 |
21 |
22 |
Note: Return on Investment (ROI) = Net Profits (Losses)/ Total assets.
NA* = Not Available
These calculations are based on the companies' financial information: Income Statement and Balance Sheet. Figures between brackets indicate negative ROI.
Reasons closely associated with public ownership explain these huge financial losses. By virtue of their public ownership, PEs have to pursue socio-political objectives which can be seen in many ways. Pricing of finished goods (sugar) is a good example of this. Prices of these finished goods are fixed well below the actual costs of production. Table 2 shows the actual costs of production and the approved prices per metric ton of white granulated sugar. The reasons for this are two-fold. Firstly, the high costs of production due to low production capacity utilization. Secondly, this commodity are regarded as popular and strategic goods and charging higher prices may cause riots and political turmoil.
The Public Corporation for Sugar Trading (PCST) - a public enterprise itself-fixes the price of sugar for all the public sector sugar companies. Usually, at the beginning of the production season, the PCST requests the public sugar companies to submit some information on the production costs. However, the management of PEs do not participate in the price-setting process. In response to this request, the financial managers of PEs in the sugar industry submit a total cost figure, which is only a rough estimate. The lack of sophisticated cost accounting systems is a problem in identifying the exact cost per tone of sugar. It is no wonder, therefore, that these companies incurred huge losses for almost the nine-year period. This, again, shows that it is very difficult if not impossible to reconcile social and political objectives with those which are commercial.
KSC, in contrast to other PEs in the sugar industry, have got a special treatment regarding the pricing of its finished product. The sugar price is fixed in accordance with the provisions of the sugar sales Agreement between KSC and Government of the Democratic Republic of the Sudan (GDRS), dated 27 the of May 1975. This agreement covered a variety of areas including allocation of sales to internal and external markets, the price-fixing process, delivery of sugar, payment of sugar prices by the GDRS, sales of by-products and restrictions on import and export of sugar. According to the agreement, the maximum KSC production capacity is considered to be 3000,000 MT of sugar. The first 150,000 MT are to be sold to GDRS as domestic sales, being settled in local currency. The price for the local sales is fixed according to a cost index which enable the company to cover its actual costs of production plus a reasonable profit margin. The other 150,000 MTs are to be sold to the GDRS as export sales and is to be settled in hard currency, that is US dollar.
The price in US$ per metric ton is equal to the daily London market prices, prevailing at the time of negotiating the price, in addition to the other transportation, freight and insurance charges. The KSC's Price Committee negotiates the ex-mill prices with the Ministry of Finance on annual basis. The proceeds of the sugar sales in hard currency proved to be useful in mitigating the problems of shortage of production inputs for KSC.
It is noticeable from Table 1, that public sugar companies, with the exception of GSC, started making either lower or positive ROI as from 1986/87 onwards. This coincided with the commencement of a huge rehabilitation programme in the public sugar industry which eased shortage of production inputs such as spare parts, some raw materials and
energy supplies (electricity and fuel). For further discussion on these problems, turn to Section 5.3.. This suggests that, although the major causes of poor financial performance of the PEs in the sugar industry are closely associated with public ownership, the hostile macro-economic environment, characterized by shortage of production inputs, is also partly responsible.
Table 3 shows the actual costs of production per metric ton of white granulated sugar in the four PEs and the private sugar company. Actual costs include all the production costs of cane production, cane harvesting, cane hauling, factory processing and packing, general and administrative expenses, social, interest and depreciation costs. To calculate the actual cost per metric tone of sugar, overall actual production costs are divided by the actual production of the crushing season.
A comparison of the average cost of the first public sugar company, GSC, which started production in 1962, and the private sugar company, KSC, gives clear indication that the private company is more efficient than the first public sugar company. This is because the KSC's average costs are much lower than that of the GSC throughout the last eight years 1981/82-1988/89. The pursuit of socio-political goals by GSC is an integrated agro-industry entity which consists of a mill and farm. The farm was originally part of the Gezira Scheme and used to grow cotton. When it was decided that the sugar mill was to be
Table 2: Relationship Between Actual Costs Per Metric Ton of Sugar and
Approved Prices in the Public and Private Sugar Companies (in SDP)
Year |
Ownership | |||||||||
|
Public |
Private | ||||||||
|
GSC |
NHSC |
ASC |
SSC |
KSC | |||||
|
Actual Cost |
Approved Price |
Actual Cost |
Approved Price |
Actual Cost |
Approved Price |
Actual Cost |
Approved Price |
Actual Cost |
Approved Price |
80/81 |
321 |
135 |
223 |
135 |
944 |
135 |
423 |
135 |
746 |
537 |
81/82 |
824 |
250 |
397 |
250 |
NA |
250 |
441 |
250 |
539 |
537 |
82/83 |
924 |
250 |
443 |
250 |
500 |
250 |
444 |
250 |
250 |
537 |
83/84 |
921 |
400 |
489 |
400 |
497 |
400 |
399 |
400 |
558 |
670 |
84/85 |
1,360 |
550 |
430 |
550 |
523 |
550 |
442 |
550 |
502 |
773 |
85/86 |
1,074 |
610 |
631 |
610 |
792 |
610 |
839 |
610 |
610 |
800 |
86/87 |
1,386 |
750 |
744 |
750 |
901 |
750 |
850 |
750 |
700 |
1,065 |
87/88 |
1,852 |
850 |
1,123 |
850 |
NA* |
850 |
1,205 |
850 |
1,148 |
1,881 |
88/89 |
3,651 |
1,900 |
NA |
NA |
2,178 |
1,900 |
2,462 |
1,900 |
1,622 |
2,900 |
NA*: Not Available
Table 3: Actual Cost Per Metric Ton of White Granulated Sugar in Sudanese Pounds (SDP).
Ownership |
Sugar Company |
Average Cost of Production | ||||||||
|
|
80/81 |
81/82 |
82/83 |
83/84 |
84/85 |
85/86 |
86/87 |
87/88 |
88/89 |
Public |
GSC |
321 |
824 |
924 |
921 |
1,360 |
1,074 |
1,386 |
1,852 |
3,651 |
|
NHSC |
223 |
397 |
443 |
489 |
430 |
631 |
744 |
1,123 |
NA |
|
ASC |
944 |
NA |
500 |
497 |
523 |
792 |
901 |
NA* |
2,178 |
|
SSC |
423 |
441 |
444 |
399 |
442 |
839 |
850 |
1,205 |
2,462 |
Private |
KSC |
746 |
539 |
523 |
558 |
502 |
610 |
700 |
1,148 |
1,413 |
NA*: Not Available
established in the Guneid area, and being pushed by the political objectives, it was decided that the farm should grow cane for the new sugar factory without defining the production relations between the tenants and the factory. Therefore, the GSC management faced undefined production relations and dealt with cane producers who are neither full owners of the land nor hired labour as in the other four sugar companies. Setting a price for cane by GSC management is a crucial and controversial management decision which involves social, political and economic considerations. Normally, at the beginning of each crushing season a delegation from the Tenants Union holds a series of meeting with the GSC management to fix a price for cane. The GSC management then prepares a special accounting study showing the costs of the agricultural operations per feddan (acre), the recommended price per ton of cane and the expected income for the tenant. The Tenants' Union pressurizes the GSC management to reduce the costs of the agricultural operations, to write off any carried forward debts and to increase the proposed price per ton of cane. The problem is further aggravated by the fact that Tenants' Union does not trust and rely on the cost calculations prepared by GSC management. In almost all cases the GSC management had historically not been able to fix a price of cane with the Tenants. When negotiations reach a deadlock, the Tenants take their case to the Ministry of Industry where higher prices, contradictory to those recommended by the GSC management, are fixed. This is done by the government because the factory was originally erected to enhance regional development by creating more job opportunities and paying Tenants higher prices for cane as it is the only source of their living.
To GSC management, this is a decision area where the reconciliation of the social and political objectives with those which are commercial proved to be difficult if not impossible. This is because the GSC management is forced by the government to pay Tenants higher prices for cane. Needless to say, this significantly increase the actual cost of production. It is not surprising, therefore, that the GSC's actual cost of production per metric ton is much higher than KSC's. The KSC's actual average cost is low partly because the company owns its cane farm and hires direct labour. The GSC's management could have abolished this tenancy system hadn't it meant to be continued as a source of job and income for Tenants.
The comparison of the actual average costs of production of the other three government-owned companies with that of the private company indicates that these companies' average cost of production is lower than that of the private company over the first three years 1980/81-1983/84. One reason for this is that the private company has started production in 1980/81 and was planning to reach maximum capacity by 1984/85. During this period PEs seem to have had lower average costs than KSC but their average costs rose significantly thereafter. This was attributable to the increase in administrative, selling and storage costs following the liquidation of the Public Corporation for Sugar and Distillery in the early eighties. Since then the PEs in the sugar industry formed their board of directors and handled their selling and purchasing operations individually. The situation was worsened by the increase in the cost of the production inputs as a result of inflation coupled with the decline in the capacity utilization rate. For these reasons KSC shows more productive efficiency, that is, lower average production costs than the public companies for the last four years: 1985/86 - 1988/89.
On the whole, therefore, the comparison of the actual average costs of the public and private sugar companies indicates that the private sugar company is more efficient than the four PEs. This inefficiency of PEs can be attributed to three reasons: pursuit of socio-political functions, tight government control and shortage of production inputs (see Section 5 for further details). Not only that, but the KSC's average cost of production compares favourably with the average cost of producing sugar in the world. This conclusion is reached by a technical report based on KSC's 1986/87 crop which compares KSC's production costs with the sugar production cost world-wide. The report was prepared by the Arkel International Company, a famous American company in the sugar industry.
According to this report, the KSC's and average world-wide production costs for the season 1986/87 are as shown on Table 4. This comparison shows that KSC's costs of production at the official and free market rates are lower than the world average. The KSC's total production costs would be even lower except that KSC, being a new facility, has very high depreciation and interest costs. Furthermore, KSC furnishes health, social and infrastructure services in excess of those normally supplied. If we disregard the interest, depreciation, social and infrastructure costs, then, according to the conclusions of the report, KSC will have one of the lowest production costs in the world. According to the report the low operating costs at KSC result form:
i Large volume.
ii excellent management and operating staff.
iii most efficient sugar factory in the world, recovering in the raw sugar about 90% of the sucrose in the cane.
Table 4: Cost of Producing Metric Ton of Sugar in US$
Cost Items |
KSCs Actual Costs per Metric Ton of Sugar in US$ at Exchange Rate of |
World Average | ||
|
1$=2.5 SDP (Official Rate) |
1$=4.10 SDP (Commercial Rate) |
1$=6.00 SDP (Free Market Rate) |
|
Production Costs |
|
|
|
|
Cane Production |
68.3 |
48.2 |
38.8 |
137.8 |
Cane Harvesting |
19.8 |
12.7 |
9.2 |
51.0 |
Cane Hauling |
21.1 |
14.8 |
11.6 |
20.8 |
Factory, Process and Pays |
59.0 |
49.3 |
44.6 |
91.5 |
General and Administrative Costs |
45.1 |
33.5 |
27.7 |
26.4 |
Infrastructure and Social Costs |
15.0 |
9.2 |
6.3 |
7.5 |
Total Production Costs |
228.3 |
167.7 |
138.2 |
335.0 |
Depreciation |
43.9 |
43.9 |
43.9 |
24.0 |
Interest |
38.9 |
38.9 |
38.9 |
21.0 |
Depreciation + Interest |
82.8 |
82.8 |
82.9 |
45.0 |
Overall Production Costs |
311.1 |
250.5 |
221.0 |
380.0 |
Source: Technical Report of KSC 1986/87 Crop showing the actual average production costs in comparison with average sugar production costs world-wide. The report was prepared by Arkel International Company, USA, June 30, 1987.
iv high sucrose cane efficiently produced at very low cost compared to other areas of the world.
v efficient and economical harvest and transport system that assures fresh cane to the factory.
vi disciplined and productive labour force.
vii hand cutting of over half of cane, and
viii production of white sugar by the double-boiling method which not only reduces costs but results in 3.5% to 4% more sugar than conventional processes of making refined white sugar.
Table 5 shows the capacity utilization rate of the public and private sugar companies for the period 1980/81-1988/89. Except for the second public sugar company, all the other PEs show very low capacity utilization rate, particularly over the period 1980/81-85/86. The KSC's capacity utilization, on the other hand, kept increasing since the commencement of commercial operations in 1980/81 until it reached its maximum capacity (94%) in 1986/87. Although the capacity utilization of both public and private sugar companies started to decline since 1986/87, KSC still showed superior performance thereafter. Comparison of the average capacity utilization of the four PEs with the utilization rate of KSC, suggests that the private sugar company outperformed PEs.
Table 6 shows the contribution of all the public and private sugar companies in Sudan. In interpreting these calculations, we have to bear in mind that the designed production capacity of the four PEs is 340,000 MTs per year and that of the private company is 310,000 MTs per year. The gap between total production and consumption is bridged through sugar imports. A quick look at this table shows that the contribution of the four PEs to sugar consumption in the country has been minimal compared to that of KSC's. The obvious reason for this is that PEs are operating well below their designed production capacity. This poor production performance has halted the government's plans to reach self-sufficiency and export sugar. It was only in 1984/85 season when PEs made a significant contribution amounting to 41% of total consumption. It was only then, and for the first time in its history, that Sudan has attained its goal in self-sufficiency. The subsequent deterioration in production in later years again made the country a net importer of sugar.
Table 5: Capacity Utilization Rate in Public and Private Sugar Companies.
Ownership |
Company |
Capacity Utilization Rate | ||||||||
|
|
80/81 |
81/82 |
82/83 |
83/84 |
84/85 |
85/86 |
86/87 |
87/88 |
88/89 |
Public |
GSC |
49 |
26 |
34 |
38 |
25 |
42 |
48 |
45 |
83 |
|
NHSC |
60 |
60 |
60 |
80 |
102 |
90 |
82 |
70 |
48 |
|
ASC |
8 |
0 |
29 |
38 |
43 |
39 |
42 |
40 |
24 |
|
SSC |
24 |
20 |
37 |
52 |
63 |
34 |
43 |
40 |
40 |
Ave. Capa. Uti. for PEs |
|
35.3 |
26 |
40 |
52 |
58.3 |
51.3 |
53.8 |
48.8 |
48.8 |
Private |
KSC |
32 |
50 |
70 |
75 |
93 |
89 |
94 |
85 |
74 |
Note: Capacity Utilization Rate = Actual Production for year /Designed Production Capacity.
This measure of operational efficiency relates labour force to total output. Disguised unemployment is measured by asking the personnel managers of the sugar companies about the estimated disguised unemployment. The estimated figure is then related to the total labour force of the respective companies to calculate the percentage. As in Table 7, the comparison of the average labour productivity of the PEs with KSC shows clearly that KSC is much more better. This is because KSC showed higher labour
Table 6: Contribution of Public and Private Sugar Cos. to Sugar Import Substitution in MTs
Year |
Sudan's Total Sugar Consumption |
Actual Production of the four Government owned Sugar Companies |
% Contribution of the four PEs to Sugar Import Substitution |
KSC's Actual Production |
KSC's % Contribution to Sugar Import Substitution |
1980/81 |
352,000 |
100,000 |
29 |
107,000 |
30 |
1981/82 |
417,000 |
73,000 |
18 |
165,000 |
40 |
1982/83 |
480,000 |
128,000 |
27 |
230,000 |
48 |
1983/84 |
457,000 |
169,000 |
37 |
284,000 |
54 |
1984/85 |
466,000 |
192,000 |
41 |
306,000 |
66 |
1985/86 |
510,000 |
158,000 |
31 |
293,000 |
47 |
1986/87 |
565,000 |
173,000 |
31 |
310,000 |
55 |
1987/88 |
570,000 |
113,000 |
20 |
265,000 |
46 |
1988/89 |
348,000 |
121,000 |
34 |
232,000 |
66 |
Source: Records of the Public Corporation for Sugar Trading (PCST), Khartoum, Sudan.
higher labour productivity throughout the eight-year period. The low labour productivity of PEs is attributable to the low capacity utilization and overstaffing. Moreover, disguised unemployment is a common socio-political objective (see section 5).
Our discussion of efficiency in the sugar industry suggests that KSC has outperformed PEs in terms of commercial profitability, capacity utilization and average labour productivity. Factors peculiar to public ownership are mainly responsible for the relative poor performance of PEs in the industry. Moreover, although the hostile macro-economic environment in Sudan had a negative impact on efficiency of both public and private enterprises in this industry, the managerially autonomous private sector still have done relatively better.
Table 7 : Labour Productivity in the Sugar Industry.
Ownership |
Company |
MTS/Worker for the year |
Estd disguised unemployment 88/89 | |||||||
|
|
80/81 |
81/82 |
82/83 |
83/84 |
84/85 |
85/86 |
86/87 |
87/88 |
|
Public |
GSC |
9 |
4 |
6 |
7 |
5 |
8 |
8 |
8 |
30% |
|
NHSC |
8 |
14 |
15 |
20 |
26 |
21 |
16 |
14 |
30-40% |
|
ASC |
8 |
3 |
4 |
38 |
20 |
33 |
26 |
15 |
15% |
|
SSC |
15 |
11 |
21 |
31 |
38 |
23 |
28 |
24 |
15% |
Ave. Capa. Uti. for PEs |
|
10 |
8 |
12 |
27 |
22 |
21 |
20 |
15 |
|
Private |
KSC |
27 |
33 |
38 |
38 |
47 |
39 |
41 |
35 |
2% |
Note: Labour Productivity in the Sugar Industry = Total Production Per Year/Total Labour Force.
In this section we will discuss some qualitative observations which support and explain the quantitative results reported in the previous section. These are essentially the three factors that have contributed to the poor performance of the PEs in the sugar industry.
Our investigations in the public companies revealed that the government maintains tight control over these PEs. Accordingly, it is the government that makes the major decisions, such as pricing of sugar, without participation of the PEs management as already discussed. Furthermore, the government financial statutes and regulations imposed on PEs are another major means of government control. These government financial regulations outline the broad lines which govern the budgeting, accounting and auditing systems in these government financial statutes are two-fold. Firstly, the most important objective which has been emphasized throughout these financial statutes is to protect public money against theft and defalcations. Secondly, to unify the practices in the government-owned companies. It is not surprising, therefore, that they have been implemented in almost all PEs in the manufacturing sector.
The government financial statutes lay down the broad lines for the financial accounting systems to be maintained by PEs. Accordingly, the statutes require that all PEs are to maintain their books of accounts, record their transactions using double-entry book-keeping system and prepare their final accounts according to a standardized format. Also, the government's statutes have contained some provisions on the budget range and structure. Thus, the financial statutes link the timing of the budget of PEs to the duration of the state budget which starts by the beginning of July and ends by the end of June the following year. Most important, however, is that the statutes made it clear that PEs have to structure their budgets according to the format used by other government units to prepare the state budget. The annual budget, subject to the approval of the Ministry of Finance, consists of two sections. The first section contains revenues. The second is the expenditure side which contains three chapters. Chapter one contains estimates of salaries and wages and other employee privileges. chapter two contains the direct operating expenses other than wages and salaries. Chapter three includes small development projects such as purchases of vehicles and air conditioners. The major objective of this kind of fiscal budgeting is to help estimate the overall state's budget and control expenditure.
The government's financial regulations have, therefore, indirectly contributed to the inefficiency of the public companies. As these companies design their accounting and budgeting systems according to the provisions of the government's financial regulations, they maintained very poor accounting and budgeting systems which do not suit commercial operations. This is because the modern management and cost accounting techniques were not used while the budgeting and auditing techniques in use are useless for performance evaluation and controlling purposes. No one can deny the significant contribution of sophisticated management and information systems to the efficiency of PEs (Boodho, 1983).
What is even worse is that, over and above implementation of the government's financial statutes, all PEs are subjected to the purchases statutes that show the ratification authorities to be shared between the Ministry of Finance and the management of PEs, together with a detailed description of the procedures connected with the purchases of raw materials and spare parts. Briefly speaking, the purchases statutes emphasized the need for strict adherence to the following procedures.
1. When purchases are to be ordered, a committee has to be formed.
2. All the purchases have to be acquired by means of open tenders procedures whereby an advertisement has to be published in the daily newspapers calling for prospective bidders. A period of two to four weeks must be allowed between the date of advertisement and the closing date of opening of tenders,
3. The tenders should be kept in a closed box on which the words "tenders box" are to be written and the key of the box should be kept by the responsible manager and unsealed tenders should not be accepted.
4. Tenders should be opened secretly by the purchasing committee after the expiration of the advertisement period.
5. Tenders should be arranged in a specific form in which some particulars, such as name of the tender applicant, the paid insurance, the tender value, terms of payment and the period during which the offer is in force, are to be inserted,
6. The cheapest tender should be selected by the purchasing committee, and expensive tenders are to be accepted only if the purchasing committee could give sound reasons for its acceptance,
7. The heads of PEs are authorized to acquire some purchases such as cars, fuel and other items produced or imported by a limited number of producers or importers through limited tenders or direct purchases rather than unlimited open tenders.
From our empirical investigation we are under no illusion that strict adherence to the government's purchases statutes have significantly contributed to the inefficiency of PEs. This is because these purchases statutes are very bureaucratic and do not facilitate smooth and commercial operation. When PEs follow these purchases statutes, it takes them a hail of time to acquire their production inputs. In some instances production may even stop as a result of following these time-consuming procedures. The following diagram illustrates the preparation of eight Nissan Lorries to transport sugar cane from the farm to the factory. Though the transaction started in advance before the crushing season starts, the crushing season, and consequently production, has to be delayed for almost a month before the lorries were finally prepared and received by the first sugar company, GSC.
KSC, on the other hand, enjoy greater managerial autonomy. It is not subject to any government financial or purchases statutes. Instead, it has its own policies and procedures manuals on accounting and budgeting systems, sales of sugar and purchases of raw materials and spare parts. KSC is, therefore, in a good position to design and implement
Figure 1
An Illustration of Rigid Adherence to the Government's Purchases by GSC
27/10/1988
The GSC's GM sent another
letter to the GM of the
Central Purchases Admini-
stration of the Ministry of
Finance asking his permis-
sion to prepare the seven
Nissan Lorries
18/10/1988
The GSC's financial con-
troller sent a letter to the
Tender Committee asking its
members to select the ap-
propriate bidder.
1/10/1988
GSC's GM writes to news-
papers to publish an adver-
tisement to inviting bidders
to compete in preparing the
seven lorries. 18/10/1988
is fixed as the latest date
for bidding.
4/9/1988
A letter is sent from GSC's
GM to the Mechanical Work-
shop manager asking him to
determine specifications of
the seven lorries.
29/8/1988
A letter is sent from the
Mechanical Workshop Manager
to the GSC's General Manager
(GM) urging him to prepare
7 Nissan Lorries to trans-
port sugar cane
1/11/1988
The GM of the Central
Purchases Administration
of the Ministry of Finance
sent a letter to the GSC's
GM giving authorization to
prepare the seven Lorries
according to the Purchases
Statutes
6/11/1988
The GSC's GM sent a letter
to the Dept. of Planning
asking for funds to prepare
the seven Nissan Lorries
15/11/1988
The Dept. of Planning of the
Ministry of Finance sent a
letter of approval to
finance preparation of
lorries to the GSC's GM.
21/1/1989
The seven Nissan Lorries
are ready for work. (NB:
the crushing season has
started by 21/11/1988 one
month behind the production
schedule.)
sophisticated management information systems such as budgeting, cost accounting and computerized accounting systems and reports. Indeed, the computer technology helped KSC to produce frequent cost reports which were effectively used for tight cost control and reduction of the production costs. The company's purchases policies and procedures manuals which facilitate quick acquisition of production inputs and the sophisticated management information systems have contributed positively to its managerial efficiency.
The pursuit of socio-political objectives in the public sugar companies can be seen in many ways. Pricing of finished good (sugar) is a good example of this. Prices of sugar are fixed well below the actual costs of production. Table 2 shows the actual production and the approved prices per metric ton of white granulated sugar.
The creation of job opportunities to the extent of overstaffing (disguised unemployment) is another area where the pursuit of socio-political objectives is very clear. Table 7 shows the labour productivity in the public and private sugar companies. It indicates that the labour force in PEs is growing steadily throughout the eight-year period. This happened at a time when the capacity utilization rate was declining. This explicitly shows that PEs create jobs even when there is no need production-wise. The problem of creating jobs haphazardly is further aggravated by the lack of job descriptions. In the first sugar company, for instance, the researcher noticed that there were two financial managers having the same title, sharing one office and doing the same job. The last column in Table 7 shows that disguised unemployment in the public sugar companies range from 15% to 30%.
Alongside their regional development role, PEs in Sudan provide social services to their employees and to citizens of the rural areas. They include health and education. Wherever an enterprise is established, the government has to allocate funds between equipment for production and for building schools and clinics. Although teachers and hospital staff are employed, paid and controlled by the Ministries of Education and Health, which also provide books and drugs, nonetheless, PEs have to contribute to other expenses such as furniture and the maintenance and provision of transportation facilities. They also provide other infrastructure services, e.g building houses, roads, and electrification facilities. Within PEs, these social and development activities are generally all mixed in with their commercial activities.
Expenditures on these social and infrastructure services are normally approved by the Ministry of Finance and Economic Planning as part of the annual development budgets of PEs. They are reported separately in their profit and loss accounts as social and infrastructure costs but are deducted from revenues as are the usual operating costs. These infrastructure and social costs are considered by the government as necessary to extend welfare and social services to the rural areas in fulfillment of the government's economic and social development plans. Needless to say, these infrastructure and social costs increase the cost of production of PEs and consequently decrease their operational efficiency.
The private sugar company, in contrast to PEs, puts more emphasis on commercial profitability and pursue the socio-political objectives only as secondary ones. Prices of sugar are fixed on cost-plus basis. This, however, does not imply that the private sector do not contribute to the economic and social development plans in the country. KSC plays a vital development role through its contribution to the import substitution, employment and social welfare.
The shortage of raw materials, spare parts and electricity have been a common phenomenon to both public and private enterprises since the early 1980s. In the PEs however, these problems are much more chronic. Besides shortage of hard currency, this is because of two other reasons. Firstly, for some PEs the shortage of these production inputs can be attributed to the government bureaucratic financial and purchases statutes (see section 5.1). Secondly, some PEs have been located throughout the country to achieve socio-political functions. Therefore, they have been located in rural areas with poor or no infrastructure (communication, electricity and transportation) facilities. It is these PEs which have been significantly affected by the problem of shortage of production inputs. The problem of shortage of production inputs in the sugar industry has been mitigated by the rehabilitation project. But, it is still a problem to reckon with.
This study sought to investigate whether public ownership is the cause of poor performance in the sugar industry as suggested by the privatization literature. In the public sugar industry, poor performance is basically attributed to factors closely associated with public ownership. These include tight government control and putting more emphasis on socio-political goals such as job creation and subsidizing the final consumer of this strategic commodity. Given the government policies to keep the PEs in this strategic sector, there are other reform measures that can address these problems within public ownership. The contractual approach has proved to be useful for improving performance of PEs in some LDCs (Trivedi, 1988, Shaikh, 1990). This is because, as Saulniers (1990) argues:
"Contract plans provide a useful counterpoint to the often heavy-handed government interference in public enterprises. Although their implementation still poses some problems, they help to clarify goals and may lead to increased autonomy and greater efficiency in the use of a nation's resources".
Commercialization of PEs in the sugar industry is still another reform measure (Ndongko, 1991).
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27/10/1988
The GSC's GM sent another letter to the GM of the Central Purchases Administration of the Ministry of Finance asking his permission to prepare the seven Nissan Lorries
18/10/1988
The GSC's financial controller sent a letter to the Tender Committee asking its members to select the appropriate bidder.
1/10/1988
GSC's GM writes to newspapers to publish an advertisement to inviting bidders to compete in preparing the seven lorries. 18/10/1988 is fixed as the latest date for bidding.
4/9/1988
A letter is sent from GSC's GM to the Mechanical Workshop manager asking him to determine specifications of the seven lorries.
29/8/1988
A letter is sent from the Mechanical Workshop Manager to the GSC's General Manager (GM) urging him to prepare 7 Nissan Lorries to transport sugar cane
1/11/1988
The GM of the Central Purchases Administration of the Ministry of Finance sent a letter to the GSC's GM giving authorization to prepare the seven Lorries according to the Purchases Statutes
6/11/1988
The GSC's GM sent a letter to the Dept. of Planning asking for funds to prepare the seven Nissan Lorries
15/11/1988
The Dept. of Planning of the Ministry of Finance sent a letter of approval to finance preparation of lorries to the GSC's GM.
21/1/1989
The seven Nissan Lorries are ready for work. (NB:the crushing season has started by 21/11/1988 one month behind the production schedule.)