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    What will the enterprise management coordination centre coordinate?

    Dr Kęstutis Jaskelevičius

    The efficient management of state-owned enterprises isn’t a thought-up problem. The fact that the economic targets are quite often determined by strategic (or pseudo-strategic) state development guidelines makes the efficient functioning and rational management of these enterprises hard to measure. It is no secret that ministries are the centres of immense political power which may substantially affect the goals of state-owned enterprises.
    A few years ago, with the view to eliminate or at least soften the negative political influence over the performance of state-owned enterprises, the Ministry of Economy suggested establishing a controlling enterprise “Visuomis Holding Company”. Alas, the management scenario was copied from the Swedish model, whereas the practical implementation of the suggested reform was, most probably, unclear even to its initiators. The idea, however, was not buried. Today it has reborn in the form of Ownership Guidelines the purpose of which is to establish a coordination centre for the management of state-owned enterprises. What and, most important, how will this centre coordinate enterprise management?

    Looking for transparency in enterprise activities
    Once no motivation for the necessity to establish the controlling enterprise “Visuomis” was found and no practical integration into the existing economic and political management system was achieved, it was decided to keep to more modest results. In 2010, the Government approved the Conception for efficiency enhancement of state-owned enterprises and Transparency Guidelines of these enterprises.
    These Guidelines have put an obligation to enterprises to make their activity and financial reports public. It is assumed that this will provide citizens with a possibility to get more actively involved into the supervision of state-owned enterprises. Alas, the active involvement of citizens in the management of state-owned enterprises is declarative and Utopian even. The availability of the reports, however, is a positive thing since it gives a possibility for all interested, first analysts and mass media, to freely get the needed information.
    The role of the Ministry of Economy in this transparency process is to sum-up these reports and conduct analysis of some figures. However does the public availability of the reports of state-owned enterprises, their superficial evaluation and commenting mean transparency? I think that the concept of transparency is far wider. It means giving publicity to decisions of enterprise boards, publication of results of public tenders, information about the systems of wages and bonuses, etc. In other words, transparency is the translucence of enterprise activity. On the other hand, here we come to the issue of commercial secrets. Therefore, transparency should be attained safely and should not be confined to giving publicity to the results of the last period. Many are interested in future plans too.

    The stage of ownership guidelines
    The real reform of the management of state-owned enterprises is a far more complex process since only its implementation may lead to the greater efficiency of enterprise activities. Here, we may agree with one of the goals that the Ministry of Economy has raised. A state enterprise cannot and should be the ownership of a ministry, whereas the function of the founder does not grant it with a right to keep them on a string or replace a director once new political parties come into power. This is why the Ownership Guidelines reasonably suggest transforming the boards of state-owned enterprises into real and competent management bodies. This is the only way to liberate enterprises from the too-aggressive patronage of ministries.
    The order of formation of enterprise boards and competence requirements for board members proposed in the Ownership Guidelines will serve this purpose undoubtedly. On the other hand, the abstract requirement for independence raised to one-third of board members calls for attention. Does it mean that it is important not to represent a certain field of activity or do not be a head of the ministry? Won’t such an abstract description of independence of a board member give a chance for representatives of competing business interest groups penetrating the board?
    A welcome fact is that the Ministry of Economy has addressed the Organisation for Economic Cooperation and Development (OECD) with the request to participate in the wok of the Directorate for State Property Management and Privatization Practise. The direct access to the experience of other countries will allow avoiding superficial and non-professional opinions and conclusions which were usual even among top-ranking public servants. That was particularly evident clearly seen during the analysis and evaluation of the activity of the forestry sector and unfairly putting it against the Swedish figures. Why wouldn’t Lithuania become a full and equal member of OECD instead of the modest role of an observer? That would significantly expand the possibilities of not only public servants but also researchers and experts in assimilating the experience of other states. To note, Lithuania had actively participated in OECD work however a decade ago stopped its activities. To my opinion this decision was a mistake.

    The mission of the management coordination centre
    The practical axis of the implementation of the Ownership Guidelines should be the Management Coordination Centre (MCC) that would function within the State Property Fund. MCC is planned to be awarded lots of rights, what is absolutely surprising. The largest block of functions is indented for the strategic management of state-owned enterprises. First goes the introduction of good strategic planning practise. Second is evaluation of the ambition-rate of long-term and short-term goals and supervision of their implementation (who will differ between ambitious and non-ambitious goals? What does the concept of ambition mean in general?). Finally, third goes the monitoring of the implementation of the strategy. We may assume that this strategic patronage should apply to all state-owned enterprises. How many different specials (energy, transport, forestry, etc.) will be needed to proficiently evaluate the reality and legitimacy of strategies? Nobody will confine to formal requirements only to provide MCC with a heap of papers called the strategic plan.
    Another group of functions relates to the already implemented Transparency Guidelines. These are the preparation of generalized activity reports of enterprises, their publication and analysis, monitoring of websites, etc. Formation of boards and monitoring of their activity will be a far more serious MCC field of activity. It is planned that MCC will prepare lists of candidates to enterprise boards, analyse their qualification and competence and later will evaluate the work of board members or even participate in the work of the boards. It’s hard to imagine how many public servants will have to control the work of the boards of enterprises.
    No less important field of activity intended for MCC will be the analysis and evaluation of the efficiency of state-owned enterprises. Let’s hope that that will not be primitive statistics of activity results by estimating ROA, ROE or D/E parameters. This analysis would be meaningless, whereas the detailed economic analysis of the activity of let’s say Lithuanian Railways would demand proficient analysts.
    The detailed analysis of the functions of the future MCC raises many contradictory thoughts. What pleasantly surprises first is the determination of the initiators of the reform of state-owned enterprises to completely reorganize this sector, separate the enterprises from the political influence of ministries and award the management process with the activity guidelines based on economic logics far as it is allowed within the framework of ever-changing financial possibilities. Second, the informal implementation of Ownership Guidelines and MCC establishment will ask for huge political willpower for many legal acts will have to be changed, probably even more than during the reform of country administrations. Third, MCC is taking the shape of a super-ministry since in many fields it is planned to take over the functions of now existing ministries. Therefore, it is no wonder that the ministries are against the reform.
    The Ministry of Transport and Communications comments upon the draft Government resolution on the implementation of the reform of state-owned enterprises, “…the effect of the suggested decision on the activity of state-owned enterprises and financial indices of the state is absolutely unexplained and motiveless, … economic and legal basis for MCC establishment has not been motivated. Reasoned doubts arise as regards the legal basis for the decisions of recommendatory and compulsory nature of this centre according to the regulations of the Law on Stock Companies and Law on State and Municipal Enterprises…”, etc. The final resolution of the ministry was not to approve of the draft resolution. Other ministries also were against.
    The initiators of the reform didn’t think about one substantial factor. MCC intends to get the status of an institution of the main management of state-owned enterprises thus removing ministries from this game. Ministries in raising their claims are right. First, that could cause confusion in the relations of enterprises and the state; second, nobody knows how long the transitional period will last since the search for specialists for MCC would take longer than a month; and finally third, even in the best case, overlapping of functions and resolutions would be hard to avoid what would cause the reasoned criticism and irritation of enterprises.

    The danger for superficiality and incompetence
    The danger of incompetence and superficiality of MCC management decisions which were not avoided during the stage of implementation of Transparency Guidelines still remains. It seems that the published reports of state-owned enterprises and conclusions they contain must speak about the peculiarities of specific activity. Otherwise the value of reports loses its significance.
    Alas, this was what happened when the report about the results and efficiency of the activity of the state forest sector was presented. The whole value of state forests which made 3.1 billion litas was included into the total of the long-term assets and own capital of forest enterprises. Those who have prepared the report call this as the increase of long-term assets and own capital by the method of discounted monetary flows including the value of commercial forests administered by state forest enterprises. This method, however, is not good. First, nobody has ever performed the evaluation of commercial forests and second the use of this methodology has nothing in common with the current activities of forest enterprises and clearly distorts efficiency indicators within the short-term period. Why?
    Activity volumes of forest enterprises, i.e. logging volumes are set by the Government by approving the annual maximum felling amount which determines how large income of forest enterprises will be. This amount is calculated according to scientifically-reasoned felling volumes with due consideration of the increment. Sustainable forestry activities and development is achieved when the annual felling volume is not larger than the increment. This means that a forest enterprise cannot independently dispose of its stands, although larger felling volumes would significantly improve economic efficiency figures. These stands have been removed from the economic turnover and forest enterprises just protect and preserve them.
    What economic logics has been used by the officials in the Ministry of Economy who have decided to include the forests which were removed from turnover into the value of long-term assets and own capital? To reduce the generated return? Then, later it could be said that forest enterprises are inefficient and this sector must be reformed by separating logging works from forest regeneration and protection? By the way, return on equity (ROE) of the forestry sector in Lithuania is the best among the European states. For example, in 2010 ROE of all forest enterprises in Lithuania (forest value excluding) was 16.1 per cent, meanwhile in Sweden (“Sveaskog” company) which is often taken as a model reached 11 per cent, Finland – 13.9 per cent, Lower Saxony (Germany) – 10.5 per cent, Latvia – 11.6 per cent, Estonia – 8.7 per cent, Poland – 10.4 per cent. ROE indicator calculated using the Ministry of Economy methodology, i.e. by including the value of immature forest was 2.1 per cent in 2010. Thus the difference of ROE indicators reaches even 14 percentage points. The strange fact is that public officials who prepare reports ignore the observations of foresters regarding the use of bad methodology.

    Does the public publishing of the reports of state-owned enterprises, their superficial evaluation and commenting mean transparency?

    It’s hard to imagine how many public servants will have to control the work of the boards of enterprises

    The danger for incompetence and superficiality of MCC management decisions remains

    The complex of logging, reforestation and forest protection allows Lithuania to be proud of the best-managed forests in Europe

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