public enterprise

public enterprise, a business organization wholly or partly owned by the state and controlled through a public authority. Some public enterprises are placed under public ownership because, for social reasons, it is thought the service or product should be provided by a state monopoly. Utilities (gas, electricity, etc.), broadcasting, telecommunications, and certain forms of transport are examples of this kind of public enterprise.

Although the provision of these services by public enterprises is a common practice in Europe and elsewhere, in the United States private companies are generally allowed to provide such services subject to strict legal regulations. In some countries industries such as railways, coal mining, steel, banking, and insurance have been nationalized for ideological reasons, while another group, such as armaments and aircraft manufacture, have been brought into the public sector for strategic reasons. In communist countries most forms of production, commerce, and finance belong to the state; in many newly independent and less-developed countries, there is a very large public-enterprise sector.

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Margaret Thatcher, 1980s.

Tim Graham—Corbis Historical/Getty Images

In Europe the prevailing pattern is a mixed economy with the public enterprises operating side by side with private corporations. In Great Britain during the early years of the 20th century, the post office, utilities, armaments, and the Port of London belonged to the public sector; to them were later added various forms of public transport, thus markedly widening the role of the state sector. Under the 1946–50 Labour government, a massive nationalization program was effected embracing coal mining, the iron and steel industry, the gas industry, railways, and long-distance road transport. During the Conservative regime of Prime Minister Margaret Thatcher (1979–90), many public enterprises were privatized. The postwar French government undertook a similar extensive nationalization program that included banks, insurance companies, finance houses, and manufacturing concerns. Many were subsequently privatized.

The United States has few public enterprises. They include, ironically, one of the world’s models for such undertakings, the Tennessee Valley Authority, established in 1933. In 1970 the U.S. postal system, until then a department of the executive branch of the federal government, became a government-owned corporation.

Public enterprises are by definition intended to be operated in the public interest. This gives rise to a number of organizational and commercial issues. One problem is how to reconcile the need for close political control with the need for sufficient management autonomy. The public corporation form, used extensively in Great Britain and widely copied in other parts of the world, is created by a special act of Parliament that defines its powers, management structure, and relationship with government bodies. As a corporation it has legal entity. Its capital requirements are met by the treasury, but it is supposed to meet its current expenses from its normal commercial operations. Its employees are not civil servants, and the top management is often appointed by the minister in charge. Another administrative form that is popular in parts of the world is the state company, which is simply an ordinary joint-stock company whose shares are owned wholly or partly by the state.

Public enterprises are usually intended to pay their way in the longer term, and yet they may be subject to political constraints in their pricing policy that could be in conflict with that objective. Conversely, for social reasons they may receive hidden subsidies or enjoy additional protection not available to competitors. Such factors tend to distort the normal commercial operations of the corporation or the company and often lead to managerial disorientation. Partly because of these noncommercial considerations, public enterprises may appear to be highly inefficient and, in times of difficult trading conditions, may be a drain on public resources. However, the measurement of the efficiency of a public enterprise is no easy matter. When it produces a marketable product, such as coal or steel, that competes with other products, the normal commercial criterion of profit may be adopted to assess its performance. In the case of a utility enjoying monopoly power, economists have developed concepts like cost-benefit analysis as a performance measurement tool. In recent years many state enterprises in the developed world have been given financial targets that take into account both social and commercial responsibilities.