When governments run business enterprises

All governments world over in the last 50 years have in many forms tried their hand at running commercial enterprises. Overall, it has been a terrible experience for the politicians, the taxpayers and the public.

The general thinking worldwide nowadays is that governments should not run commercial enterprises, no matter whether they are profit-making or not and governments should only limit their involvement to simply running critical public utilities and providing oversight.

We all know it’s not the government’s job to run businesses. It should act as a regulator and facilitator. Over the years successive governments since independence have dumped hundreds of millions of rupees just to prop-up loss making State-run corporations at the expense of the taxpayer and as result created little value.

Why they fail

Governments usually fail in business because politicians, not business executives, run governments. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business.

Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than the long-term consequences, even when those consequences can be easily foreseen. Most politicians therefore tend to favour parochial interests over sound economic sense, while markets will always deal efficiently with shortages and gluts.

Politicians need headlines; letting the market work doesn’t produce favourable headlines and, indeed, often produces the opposite. Then, governments use other people’s money. Companies have to play with their own money. Therefore cost efficiencies are alien to the culture of all bureaucracies. Indeed, when cost efficiencies are inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.

Usually, the CEO of a private sector company has the power to manage effectively. He decides company policy, recruits the right people and allocates resources very much as he thinks best to achieve the set objectives for the year. The board of directors generally does nothing more than challenge some of the initiatives and then ratify his moves and will certainly fire him if he fails to deliver the promised results. This allows a company to act quickly when needed.

Regulator

The next issue is that the government is regulated by the government. It is the government’s job to make and enforce the rules that allow a society to flourish. But it has a dismal record of regulating itself. Therefore, we all know capitalism isn’t perfect. Indeed, to paraphrase Winston Churchill’s famous description of democracy, “It’s the worst economic system except for all the others”.

But the inescapable fact is that often it is only the profit motive and healthy competition that help to keep enterprises lean, efficient, innovative, encourage meritocracies and become and remain customer-oriented.

Therefore when State enterprises make losses, it is undoubtedly ‘bad news’ for the public, big or small. This is why many people world over these days do not want governments to engage in managing businesses, simply because they are not good at doing that. Instead they could certainly do a better job as a regulator and as a facilitator and thereby serve the community far more effectively and also remain popular with the public.

(The writer is a Senior Company Director.)