The efficiency and effectiveness of Malawian parastatals

Journal of International Development: Vol. 8, No. 6, 747-765 (1996)

THE EFFICIENCY AND EFFECTIVENESS OF MALAWIAN

PARASTATALS

COLIN LAWSON School of Social Sciences, University of Bath

and

BEN KALUWA Department of Economics, University of Malawi

Abstract: Eight Malawian parastatals are studied. Using published data and unique material from structured interviews with senior management, the governance, mode of operation, objectives, efficiency and effectiveness of the companies are examined. They are found to be subject to multiple principals and conflicting objectives. Inter- vention is multifaceted and non-commercial constraints have been imposed. They have rarely followed or been allowed to follow the reform agendas suggested by either theory or by international agencies. A novel methodology to assess effectiveness is developed, and the characteristics of consistent objectives, autonomy, accountability and performance indicators are identified as crucial to improved performance.

1 INTRODUCTION

The World Bank classifies Malawi as the 14th poorest country in the world, with a per capita GNP of $230 (1991 dollars). Life expectancy is 45 years. Although the average growth rate from 1980 to 1991 was almost 3.5%, the average growth rate per capita was only 0.1%, because the population increased at an annual rate of 3.3%. The current population is 8.8 million: the size of a hypothetical stationary population is 73 million (World Bank, 1993).

The key to demographic stability is the fact and expectation of improved economic well-being. In Malawi that has depended on government policy, because market forces have not been the main influence behind development strategy (Kydd and Christiansen, 1982). And within that development strategy the para-

The fieldwork for this study was carried out at the University of Malawi and the University of Bath during 1987-91 under a British Council-sponsored research link. Financial, logistical and administrative assistance from the British Council is gratefully acknowledged. We would also like to thank the management of the various parastatals for their cooperation, and John Cullis. Edward Horesh, Benson Kandoolie and Paul Mosley for their assistance in earlier stages of the project, and an anonymous referee for helpful comments on a previous draft.

CCC 0954-1748/96/060747-19 0 1996 by John Wiley & Sons, Ltd.

748 C. Lawson and B. Kaluwa

statal sector is crucial. It accounts for about one-quarter of GNP, and in the mid- 1980s subsidies and grants to it amounted to one-tenth of government expenditure.' In the early 1980s, among other factors, a combination of economic recession, transport disruption because of the crisis in Mozambique and the impact of foreign indebtedness, caused a rapid decline in parastatal profitability. Since then its financial performance has improved, but the sector remains of key interest to the government and international agencies, partly because recovery is incomplete and partly because this sector is an important potential area for future growth.

This paper reports a study of the effectiveness and efficiency of a sample of eight of the major parastatals, using both published sources and interview material. The study includes six of the 12 largest commercial parastatals: Agricultural Develop- ment and Marketing Corporation (ADMARC); Malawi Railways (MR); Electricity Supply Commission of Malawi (ESCOM); Air Malawi (AM); Malawi Housing Corporation (MHC); Blantyre Water Board (BWB) and, assessed as a separate entity, an important subsidiary of ADMARC, Cold Storage (Malawi) Ltd (CS). In addition, one important quasicommercial parastatal, the Smallholder Tea Authority (STA), was included in the sample. The first six were chosen because of their commercial importance; CS because it was a significant company operating at one remove from the main parastatal, that is two steps distant from being a subdepartment of the government; and finally STA for comparison, because of its quasicommercial status. Brief descriptions of the parastatals are given in an Appendix.

The remainder of the paper is divided into three sections. The first makes some observations on the theory of state-owned enterprises in market economies and indicates why we feel that a formal modelling approach is inappropriate in this case. The second section provides the assessment of the parastatals, and includes the development and application of a novel methodology for the qualitative assessment of a firm's effectiveness. The conclusions are summarized briefly in a final section.

2 THEORETICAL BACKGROUND

The economic theory of State-Owned Enterprises (SOEs) suggests why govern- ments want to create them, where they will be effective, the problems they will face and the policies which will improve performance. They are created to tackle natural monopoly, to provide a lever for government planning and to redistribute economic power, income and wealth.2 In the case of Malawi:

Each of the 35 [parastatals] was created because it was felt that a particular range of goods or services important to either the basic welfare of the community or the economic and social development of the country would not be provided, or would be provided inefficiently or inequitably, by either the private sector or by the Civil Service. Parastatal status is seen as an arrange- ment whereby the Government can maintain control over policy in a given area while giving an agency access to a mix of skills and methods of operation not open to the Civil Service (DEVPOL, p. 155).

' Government of Malawi, Statement of Development Policies 1987-1996, pp. 155-156. Hereafter referred to as DEVPOL. * For an extended discussion of these issues see Lawson (1994).

The Efficiency and Effectiveness of Malawian Parastatals 749

Unfortunately, there are not clear-cut theoretical reasons why an SOE should outperform a private firm, for as Baumol (1984) argues, even where the product has some public goods characteristics, this may simply signal the need for a subsidy to avoid underprovision. But as there are many different social and political rationales for state enterprise, this suggests that there will be a range of parastatals operating in different economies, and consequently demanding a range of models to represent their chief characteristics.

Although there has been a wide range of different approaches to theorizing about SOEs (Vogelsang, 1990; Lawson, 1994), there are no models which could be directly tested using our Malawian data. The reason is that all of the approaches, whether positive or normative, assume that the parastatal can be modelled with a unique objective function, and with specifiable trade-offs between the different arguments of that function. In such cases the principal (e.g. the state) directs an agent (e.g. a state-owned enterprise) in an unambiguous manner, and interest focuses on how any incompatibilities can be optimally resolved by the construction of an incentive-compatible contract. The possibility that there may be several principals and inconsistent orders is of course highly destructive of theorizing (Aharoni, 1982), indeed so destructive that a range of evasion techniques have been adopted, ranging from ignoring it (Navajas, 1984) to the creation of un- specified bargaining mechanisms to produce consistent objectives (Levy, 1987).

Unfortunately multiprincipal parastatals are not hard to find, so the assessment of theoretical strategies which neglect the problem has to be empirical. The Malawian parastatals which we have examined, and will discuss in detail below, show evidence of having to respond to inconsistent objectives coming from different government sources. We will show that their salary scales are such that budget- maximizing models are clearly inappropriate, and a managerial utility maximizing approach might seem more promising. In practice, management performance seems to be judged on whether the SOE operated smoothly, and on its financial results. The precise judgemental criteria, as so often in non-private firms, are hard to quantify with precision, both for us and, we suspect, for management. Indeed, from a principal’s viewpoint the agent may try harder and be more responsive to instruction if there is some doubt over the reward structure. Too much doubt, on the other hand, generates confusion, loss of morale and a fall in productivity.

The facts that Malawian SOEs are subject to multiple principals, that multiple- principal models of SOEs do not exist and that, along with inadequate competition and multiple objectives, multiple principals are a major source of SOE inefficiency (Vogelsang, 1990, p. 93) may seem decisive in requiring us to conduct a purely empirical study leading to an almost certainly negative assessment of the firms. However, theory does have a role to play in informing and structuring the study. I t may also turn out to be the case that, although the theoretical literature dismisses the case of multiple principals as largely intractable, there will in future be some progress in this area. Our remarks are speculative, but there are interesting current developments in the theory of regulation (Laffont and Tirole, 1993, p. 668; Tirole, forthcoming) which may eventually allow the development of at least a normative theory of SOE governance with several principals. As Laffont and Tirole (1993) put it, there is an interesting question as to why some companies have several regulators. They argue that several regulators may sometimes be optimal because this makes capture by interest groups harder; it may provide an optimal balance of


incentives for management, and it may, by creating or giving voice to different groups of advocates, create improved information for public policy. In principle, it seems possible that this approach may eventually lead to multiple-principal models of SOEs. These, for example, could have a role for a polity or a circle of politicians who exert a strong direct influence on managerial appointments, modify the set of objectives and dilute the importance of financial or commercial performance in the determination of such rewards as managerial tenure and the tolerance of expense preference. Such considerations would apply to the Malawi situation (see Mhone, 1992, p. 6) but would have been impossible to investigate under the political circumstances prevailing in 1988. New openness has brought to light political appointments of unsuitable managers and corruption (see Michiru Sun, Vol. 1, No. 3, April 1993; The Independent, Vol. 1, No. 36,25 September to 1 October, 1993; and Malawi Democrat, Vol. 2, No. 12, 6-12 October, 1993).3

In the absence of such models our task is to explore the practical consequences for our sample of SOEs of operating under multiple principals, and also to compare our results with some of the conjectures which occur in other areas of the literature. The non-multiple principal literature on SOEs predicts a wide range of undesirable characteristics, which originate in the different objectives of principals and agents, in the non-commercial objectives and constraints imposed on the parastatals and in monitoring problems which lead to information asymmetries. The characteristics can include a high level of non-pecuniary benefits in managerial pay (Frech, 1976); inadequate investment appraisal and non-competitive hiring practices (Kimenyi, 1985); suboptimal pricing and managerial slack (Gravelle, 1982); and a general inability to attain technical and economic efficiency. Our use of theory then is to provide a commentary on our results, rather than as an engine to generate predic- tions to compare with the results. And our reason for this approach is that as yet in neither the positive nor normative theoretical literature are there models which would correspond to the stylized facts of the experience of Malawian SOEs.

3 EMPIRICAL EVIDENCE: EIGHT MALAWIAN PARASTATALS

The analysis of parastatals, whether informed by theory or by more practical considerations, suggests that their effectiveness depends on a series of organizational characteristics, ranging from consistent realistic objectives to a commer- cially minded manage~nent.~ In this section we use evidence from case studies of eight Malawian parastatals to assess companies’ effectiveness. The case studies involved collecting data from a wide range of public sources, and from detailed questionnaires, with non-prompted answers, which were administered to senior management in face-to-face interviews. Many of the interview data were cross- checked against government and company documents and, while the normal caveats apply, it is worth emphasizing that because of the sensitivity of this type of research it is very unusual to be able to collect such information in any economy, developed or developing. For example, the theoretical literature surveyed in

On-going investigations of this issue will be used in an update of Kaluwa and Lawson (1992). The polity extends to business ownership interests which have clouded the privatization exercise (see The Independent ibid. for an exposure of the controversial sale of Wood Industry Corporation).

See World Bank (1983; 1988) for discussions of parastatal performance and reform.

The Efficiency and Effectiveness of Malawian Parastatals 75 1

Lawson (1994) includes and refers to almost no empirical evidence, and the sparse empirical literature which is available usually has to make use of very limited production and financial data. Both theory and experience suggest that such data cannot be reliably interpreted unless we know the objectives of the firm, both explicit and implicit, and the controls and interventions to which it is subject. Although we have not been able to use private classified data, we have been able to explore the decision-making environment of the firms in great detail, with the cooperation of the managements. For this reason the studies on which this paper draws present a unique complete picture of parastatals’ economic operating environments.’ In this section we review the organizational characteristics which may have a positive impact on performance, indicating the assumed link, the likely obstacles to its achievement and the record of the sample of parastatals. We examine whether their performance accords with government objectives; whether there are any remarkable patterns of results between the firms; whether they have improved their performance in relation to the sought-after characteristic; and, finally, what these results reveal about their efficiency and effectiveness.

Objectives

Consistent and realistic objectives can make management more productive by providing clear goals whose attainability should improve morale. There is the added benefit that their transparency will assist monitoring by management, by government and by the public. It will be easier to establish them if management and government have negotiated and agreed the objectives before production begins, and the development and adoption of a medium-term corporate plan can be a useful planning exercise to encourage such agreement, provided, that is, both sides try to achieve it. As Sah and Weitzman (1991) argue, outcomes can be significantly improved if the authorities will undertake precommitments that are credible. This is particularly important because, as Laffont and Tirole (1993, p. 637) note, one of the major practical problems with public ownership, and from a theoretical viewpoint perhaps the origin of its costs relative to a privately regulated firm, ‘is a suboptimal investment by the firm’s managers in those assets that can be re- deployed to serve social goals pursued by the public owners’. The case they discuss is highly abstract - the non-monetary investment involves effort, not money, and yields zero benefits to firm outsiders, though when captured by the authorities it yields greater social than private benefit -but is illustrative of the fact that public ownership may lead to suboptimal effort by managers.

But management and government also have incentives to fudge objectives and to encourage inconsistent plans. For management may be able to hide indifferent skills and a lack-lustre performance in a thicket of impenetrable goals and untrace- able trade-offs. ‘Since bad performance is always a possibility, a longtime marketing strategy is to create a multitude of goals that put a pleasant veil over firm

The working papers by Kaluwa (lY8Ya, b. 1990) and Lawson (1Y8Ya-d) contain detailed examinations of seven parastatals. As ADMARC was the subject of a different efficiency review at the time of our fieldwork, we limited ourselves to assembling data on only a subset of the issues covered for other parastatals. A short version of the questionnaire, which was administered in face-to-face interviews with senior parastatal management, is appended to Kaluwa and Lawson (1992).


Table 1. Conflict of objectives.

Conflict ParastataI’

Commercial’ versus employment Commercial versus uneconomic services Commercial versus national interest Commercial versus access for ordinary citizen Commercial versus cross-subsidies for subgroups Commercial versus developmental Commercial versus state-directed investment Commercial versus expansion of crop area Commercial versus volume of output Commercial versus anti-inflationary policy Commercial versus social concerns Food security versus market liberalization Self-sufficiency versus expansion of crop area

AM, MR AM, MR. ADMARC AM, MR MR BWB, MHC ESCOM ESCOM STA MHC BWB, CS, MHC MHC ADMARC STA

’ Commercial refers to either the objective of making profits or, as with STA, recovering costs. * AM, Air Malawi; MR, Malawai Railways; ADMARC, Agricultural Development and Marketing Corporation; BWB, Blantyre Water Board; MHC, Malawi Housing Corporation; ESCOM, Electricity Supply Commission of Malawi; STA, Smallholder Tea Authority; CS, Cold Storage (Malawi) Ltd.

performance’ (Vogelsang, 1990, pp. 61-62). And even when this is not the motive the ‘problem with many government objectives is that, unlike profit maximisation, they are hard to contract upon. It may be costly, for instance, to describe the state- contingent shadow price of employment in a contract with the firm’ (Laffont and Tirole, 1993, p. 643).

Table 1 indicates the conflicting objectives which beset the operations of this sample of parastatals. The conflicts need little explanation, except perhaps those involving ADMARC and the STA. The experiment with market liberalization has involved allowing private traders to operate in small ‘bush markets’ where the volume of sales was insufficient to justify an ADMARC presence. In practice, the traders have not confined their activities to this periphery of the monetized economy, nor have they adhered to the licensing regulations or the stipulated purchase and resale price for maize. The entirely predictable evasions have damaged the objective of food security, which among other preconditions requires that policy- makers know the size and distribution of the main food crops. One of the less desirable consequences of market liberalization is that private traders have filed incomplete returns, both to avoid admitting breaching the price regulations and to evade income tax. Hence the conflict with food security. However, while ‘there were some areas of trader activity that should have been forcefully regulated, e.g. licenses, report filing, and monitoring the accuracy of sales’ the overall experiment in liberalization was a success’ (Christiansen and Stackhouse, 1989, p. 737).

The second set of conflicts which needs an explanation are the trade-offs between recovering costs, expansion of the crop area and small-holder self-sufficiency, which face the STA. Providing infrastructural services on what it sees as, but has failed to persuade the government is, increasingly marginal tea-growing land in the


Thyolo and Mulanje districts damages the STA’s commercial objectives. If the land really is of limited potential for tea growing, then pressing ahead with its replant- ing, as instructed by government, will reduce the production of other food crops and damage the national objective of self-sufficiency.

Theories of state enterprises assume that they have objectives other than maximizing profits, and for that reason trade-offs are inevitable. This is true of the parastatals in this study. Aparently less reassuring, at least if we want to develop a tractable theory, is the finding that some conflicts occur because the parastatal has more than one principal. This possibility is inherent in Malawian parastatals, because apart from the parent ministry and the Treasury section of the Ministry of Finance, the Department of Statutory Bodies (DSB) has extensive oversight and control powers, including the right to send representatives to board meetings. Other ministries may also have similar powers. The not uncommon consequence is inconsistent targets. For example, for Air Malawi the DSB is keen to press cost- covering policies, but on occasion the Department of Civil Aviation wants the development of uneconomic routes. Again, the Treasury tends to assess the Malawi Housing Corporation by its financial performance, but the Office of the President and Cabinet is more concerned with the number of developed plots which are available.

We could argue on a priori grounds that, because there is an incentive to do so, there will be some pressure to develop institutions which will resolve conflicting objectives. There are several examples of such arrangements in the governance of these parastatals. ADMARC has a Price Review Committee composed of management and government officials which attempts to resolve conflicts. The BWB has developed and adopted a medium-term corporate plan which has an impressively coherent set of objectives, with the focus o n efficiency improvements. Again, for all parastatals, the board of directors could function as a conflict-resolving device. The current official intention is that the board ‘. . . will not be expected to function in the same manner as an ordinary corporate policy board. Rather it will be expected to act essentially as a Board of Trustees which exercises a general supervisory and surveillance function on behalf of the Government’ (DEVPOL, p. 163).

The clear intention is to create a rather passive supervisory board and to devolve some day-to-day decision-making to the managerial level; but the advisory capacity still contains the potential for conflict resolution. The empirical evidence is that in practice parastatal boards do resolve conflicts, but some more consistently and effectively than others. For example, with Air Malawi it appears that obtaining authoritative board decisions is a problem because the seniority of the civil service alternates for the ministerial secretaries varies unpredictably. On the other hand, BWB reported the same phenomenon, but did not see it as a problem because in its case conflicts were rare, because while the DSB was very active in its supervisory function the parent ministry of Works and Supplies (Water Department) was passive.

In some cases the conflict was unresolved, or resolved by management or govern- mental order. Thus, the STA is expanding production into what it thinks are marginal uneconomic areas, and ESCOM will probably have to set aside its doubts about demand and further expand an already underused capacity. Malawi Railways has already had to modify its objective of access for the ‘common person’, and in the face of substantial losses raise charges in relation to average earnings. In all


three cases the government used its legitimate authority to impose a solution, but, as we will see below, this does not mean that there is a case for any further general centralization of control; indeed, there is ample evidence from other countries that such a policy can, by killing initiative, seriously damage performance (Grosh, 1987, 1991).

However, one plausible conjecture in the literature which was not confirmed was Mazzolini’s suggestion that when the government set high profit targets in the presence of social objectives ‘many . . . enterprises resolve the dissonance by concluding that profitability is not important’ ,6 Although the pressure for improved financial results has increased during the last decade, and as Table 1 shows has created conflicts, there is no evidence of current managements abandoning objectives which cannot be attained in their entirety.

If we compare the parastatals’ experiences, there are no discernible important differences in respect of their exposure to conflicts between objectives, the resolution of those conflicts or the degree of government intervention between the six main commercial parastatals on the one hand and the quasicommercial STA and the parastatal subsidiary, CS, on the other. Although CS is at two removes from being a government subdepartment, and it receives DSB concerns through the channel and filter of ADMARC, it still interacts directly with the Ministry of Agriculture and even more frequently with the Ministry of Trade and Industry. The only subgroup phenomenon which is worth remarking on is that AM and MR face some similar conflicts, though as both are key components of the transport network this is perhaps understandable. Price controls and anti-inflation concerns impact on financial performance throughout the parastatal sector, which reflects the very high degree of state intervention in the economy, and perhaps also some desire to limit the effects of monopoly power.

We argued above that clear, attainable objectives with specified trade-offs would enhance parastatal performance. A possible way of attaining this ideal is a negotiated agreement between government and management, and in particular the development of a corporate plan. BWB, ESCOM and other SOEs have produced or are working on such plans, and this signals a potential improvement in their efficiency. But the plans must be internally consistent, implementable and imple- mented before the extent of the improvement is clear. Apart from these inno- vations there has been more emphasis on market liberalization and commercial objectives and less on employment creation in recent years. However, the social objectives of parastatals are still generally implicit and the government is reluctant to earmark explicit subsidies or to set limits to such activities. As we have already argued, the increased commercial performance pressures often seem to be additional to and not substituted for other targets, and it remains to be seen whether they can be met.

Autonomy, Accountability and Effectiveness

Because of the adverse reaction of managerial performance to government intervention (Levy, 1987), and because informational asymmetries provide manage-

Mazzolini (1979). reported in Eckel and Vining (1982), p. 215.


ment with a superior view of production possibilities, there are good theoretical reasons for minimizing state intervention in the process of plan fulfilment. Thus, the purpose of establishing a degree of managerial autonomy in the pursuit of government-decreed targets is to raise efficiency by achieving state control without unnecessary intervention.

The constraints on realizing autonomy are the familiar desire of bureaucracies to display their strength by rearranging resources and subordinates and genuine doubts about the ability of management to show sufficient initiative to fulfil the plan. As the need and the desire to intervene is greater where objectives clash, and conflict and inconsistent intervention can provide real and bogus alibis for managerial performance, these doubts may be self-fulfilling.

In fact, the official position on management autonomy is cautious almost to the point of not mentioning it. The DEVPOL indicates what management is supposed to do, but not the scope of its powers to do it. Management is to work with the board to produce policy recommendations, to carry out government-approved policy, ‘to assemble, analyse and later present . . . information [on technical and policy matters] to the Board and to the Government. [But] all external policy decisions . . . must . . . ultimately be taken or approved by the Government’ (DEVPOL, p. 164). However, the already noted reason for the choice of parastatal form: that it allows the organization access to ‘a mix of skills and methods of operation not open to the Civil Service’ (DEVPOL, p. 155) implies a more entrepreneurial and autonomous management. But the only explicit reference to it is the stated intention that ‘increased autonomy [be] given to management to recruit and dismiss employees’ (DEVPOL, p. 155).

Our study did reveal that Air Malawi had recently experienced a fall in the number of decisions which have to be approved by government, but this was an isolated remark, and the example, that the appointment of clerks no longer needs confirmation, indicates the remarkable detailed labour market surveillance to which the parastatals are subjected. Similarly, anything other than very minor capital projects require board or government approval. For example, AM must refer the purchase of a new vehicle to its board, while for a capital project over K6000 the Blantyre Water Board needs DSB approval, and must give 2 months’ notice. Unbudgeted current expenditure of more than K500 needs a month’s warning. Wage levels and scales are subject to central government approval, and although slightly different and a little more flexible than civil service schemes are essentially the same for all commercial parastatals, and only allow managerial discretion in respect of increments and small merit awards. Interestingly, the only exception was ADMARC’s commercial subsidiary, Cold Storage, where the government exercises more limited interventionary powers over appointments and salaries. On product markets, management can propose new tariffs but, with the exception of a limited subset of Cold Storage’s lines, government disposes. This generates some of the conflicts noted in Table 1.

Management can influence decisions through negotiations on corporate plans, through proposals for annual capital and expenditure budgets and through tariff and salary submissions but, as the DEVPOL suggests, and managers confirm, apart from the freedom to implement budget-approved operations, the scope for autonomous decisions is extremely limited. As one manager put it, agencies interfere with autonomy, particularly with staff appointments, regardless of World Bank


recommendations. However, not all interventions have negative consequences - government can act as a facilitator or prevent dysfunctional managerial initiatives - but, especially when represented by diverse agencies, its impact can be to confuse the issue, and to encourage too much risk-averse behaviour. One parastatal had had sufficient experience of different departments countermanding each other’s verbal instructions that it required written confirmation before changing direction. Overall, there is little variation in autonomy: some parastatals dealing with particularly sensitive areas, such as housing, are subjected to more interventions than others, but all managements face similar curbs on their powers. Even Cold Storage, from whom ADMAC holds the DSB at arm’s length, still receives detailed interventions from Agriculture and from Trade and Industry.

Standard theories of state-owned enterprises predict that there will be efficiency losses because of the dissonance between principals’ and agents’ preferences in the presence of asymmetric information. The major step towards minimizing such losses is to make management more accountable for a company performance which is measured in prices which reflect resource scarcities. This requires an incentive system which links rewards to performance, and a monitoring system producing opportunity cost information. The benchmark efficiency standard is the competitive profit-maximizing solution, adapted to reflect the environment in which parastatals operate. Thus, recorded profits have to be adjusted to reflect the degree of monopoly power, the cost of pursuing non-commercial objectives, the correct shadow prices of inputs and outputs and the degree of which objectives diverge from those of a private firm. This last correction can involve the exclusion of items which government do- not wish to influence incentives and thus behaviour, and the addition of further objectives to the assessment framework. For example, the World Bank (1983, p. 81) suggests that interest payments might be removed from costs ‘so as not to encourage SOE managers to waste time on . . . interest arbitrage’.7 Another example would be to remove exchange rate losses on loan servicing and repayments if they could not have been anticipated and were caused by government policies well beyond the control of parastatal managers.

Additional targets which can be added to the appraisal framework if it is felt that they will be inadequately reflected in the short-term ‘public profits’ concept just outlined could include product innovation, replacement and net investment, research and development, process innovation and maintenance. If shadow prices prove difficult to calculate, an alternative strategy is to remove controls and use market prices. And if output prices reflect long-term marginal costs then the efficiency information distortions of market power will be minimized. Further improvements would flow from the use of standard investment appraisal techniques, management and financial audits, and removal of inter-agency arrears within the public sector and pressure from competition, the public or clients.

It is obviously difficult to overestimate the degree of opposition which this assessment scheme would generate. Apart from a myriad of special interest groups, opposition is also probable from a management whose ethos may be more bureau- cratic than entrepreneurial, and whose skill lies more in its ability to accommodate the conflicting pressures of rival agencies than in its feel for the shifting opportunities

’ In fact for Malawian SOEs interest charges and exchange losses are not usually excluded in discussion of performance.


Table 2. Parastatal accountability indicators: criteria for index score.

Dimension 1 2 3

1 Profit objective

2 Subsidies for uneconomic

3 Price distortion 4 Degree of competition 5 Freedom to select product

6 Freedom to alter labour

7 Freedom to alter wages 8 Freedom to choose

9 Freedom to order imports

activities

mix

force

suppliers

10 Freedom to maintain, replace or add to equipment

11 Standard investment criteria

12 Capital borrowing rates

13 Internal efficiency audit

Maximize: few exceptions

Earmarked subsidies

Little or none Substantial Substantial

Substantial

Substantial Substantial

Substantial No problems

Applied

Market rates

Regular

Make profits: key exceptions

General but limited

Moderate Limited Limited

subsidies

Limited

Limited Limited

Limited Some delays

Use limited

Mix of market

Occasional and other rates

Cover costs: little concern with profits

deficits Cover overall

Severe Little or none Little or none

Little or none

Little or none Little or none

Little or none Severe delays

Not used

Non-market rates

No record

of the market place. In empirical terms we might observe these pressures in an inability to reduce the labour force to reflect a fall in demand, to remove failed product lines, to obtain compensation for instructed but uneconomic activities, to choose their preferred suppliers, to import inputs as required and to borrow from their chosen financial institutions in unrestricted amounts at the market rate of interest. These characteristics are direct evidence of the extent to which parastatals diverge from economic accountability and, as we have argued, much of this divergence originates in their limited autonomy.

To assess the state of accountability for Malawian parastatals and hence to assess their potential for economic efficiency, evidence on 13 separate aspects of this characteristic was reviewed and a subjective assessment made on a three-point nominal scale. The criteria for assessment are given in Table 2, the raw scores in Table 3 and the transformed scores in Table 4. In developing this methodological innovation the dimensions which were selected are those which on theoretical grounds are most likely to affect performance. A high score on a particular dimension, or overall, should not necessarily be interpreted as evidence of poor management performance. More commonly it reflects the degree of government- imposed restriction under which the management must operate. Thus the overall average score of 2.4 (or 30 per cent accountability) in the main reflects the fact that the parastatals are neither generally encouraged nor allowed to take a significant degree of initiative in deciding how to achieve targets. But, in fact, where they do have scope for independent action, for example in instituting a regular system of efficiency audits, they do not seem to make full use of it. This is doubly unfortunate

Tab

le 3

. Pa

rast

atal

acc

ount

abili

ty in

dica

tors

: raw

sco

res.

Q

3

Dim

ensi

on

AM

M

R

BW

B

ESC

OM

A

DM

AR

C

STA

M

HC

C

S A

vera

ge

*b

' 1

Prof

it ob

ject

ive

2 Su

bsid

ies f

or u

neco

nom

ic a

ctiv

ities

3

Pric

e di

stor

tion

4 D

egre

e of

com

petit

ion

5 Fr

eedo

m to

sel

ect p

rodu

ct m

ix

6 Fr

eedo

m to

alte

r la

bour

forc

e 7

Free

dom

to a

lter w

ages

8

Free

dom

to c

hoos

e su

pplie

rs

9 Fr

eedo

m to

ord

er im

port

s 10

Fre

edom

to m

aint

ain,

repl

ace

or a

dd to

equ

ipm

ent

11 S

tand

ard

inve

stm

ent c

rite

ria

12 C

apita

l bor

row

ing

rate

s 13

Int

erna

l eff

icie

ncy

audi

t

2 2

3 3

3 3

1 2

3 1

1 3

2 2

NA

3

2 1

3 3

3 1

1 1

2 2

2 3

3 2

3 3

3 2

3 2

3 3

1

2 3 2 3 NA

1 3 2 2 2 3 3 3

2 3 2 2 3 2 3 2 2 NI

3 1 3

3 3

2 2.

4 3

3 3

3.0

2 3

2 2.

1 3

3 3

2.4

3 3

2 2.

5 3

3 1

2.0

3 3

1 2.

8 1

1 2

1.4

NI

1

NI

1.8

NI

1

3 2.

3 3

2 3

2.9

3 3

2 2.

4 3

3 2

2.6

Ave

rage

sco

re

2.2

2.3

2.3

2.4

2.3

2.7

2.5

2.3

2.4

NA

, not

app

licab

le; N

I, no

info

rmat

ion.


Table 4. Accountability indicators: percentage scoresa.

By company (YO) By dimension (%) By category of dimension (YO)

AM 40 MR 3s

BWB 3s ESCOM 30 ADMARC 35

STA 1s MHC 2s cs 3s

Profit objective Subsidies

Price distortion Degree of competition Select product mix

Alter labour force Alter wages Choose suppliers Order imports Maintenance, etc. Investment criteria Capital rates

Internal efficiency

15

Market situation 33 25

50 10 80 60 35 5

30

k Inputs 39

10 } Appraisal 10

aObtaincd by applying the following transformation to the raw scores: ~ ( - 1 ) + 3 100

1 Percentagc accountability = ~ 2 x -

where x = raw score.

as the DSB is acknowledged to have an inadequate efficiency assessment capability (DEVPOL, p. 156).

Table 4 shows that the quasicommercial STA is the least accountable parastatal, which was predictable from its disconnection with the market, and that Air Malawi is the most accountable. Apart from the fact that during the 1980s it operated as though it had an employment function, the degree of competition it faces might have suggested this result. It might seem surprising that Cold Storage is not more accountable, but while it formally operates at two removes from the government, it is still subject to detailed intervention.'

The results on the individual dimensions of accountability illustrate the relative impact of controls. Firms have most freedom to import and to choose their own suppliers, but this is a misleading conclusion. The fieldwork was undertaken at a time when, partly because of Structural Adjustment Funds, the foreign exchange constraint was unusually loose. Also, although there is considerable freedom to choose suppliers, the degree of concentration in Malawian industry largely negates this advantage (see Kaluwa, 1986, p. 82). For example, Air Malawi buys its fuel from Oilcom, which uses its monopoly power and the airline's dependence on its home base to charge high prices.

' The ranking of companies by their overall accountability score is obviously in part dependent on the weighting of the dimensions of accountability. The relative results in Table 4 are produced by an equal weighting for all dimensions, but are reasonably robust. For example, if we dropped the 'objectives' and 'appraisal' dimensions and simply allotted SO per cent of the weight to the 'market situation' dimensions and SO per cent to 'inputs' group then the only significant relative change in company evaluation is for BWB, which drops to sixth position at 25 per cent accountability (average 35 per cent). This reflects its relative inability to influence its highly constrained market situation.


In effect, the more impressive results in terms of accountability are likely to flow from the facts that the output markets exhibit only a moderate degree of price distortion and that parastatals have shown some ability to reduce their labour costs to improve performance and to react to adverse-demand shocks.’ But efficiency would clearly improve if they were allowed to change wages in response to recruitment and retention problems, if they operated consistent and discounted present value investment appraisal methods, and conducted regular extensive internal efficiency audits.

Performance Incentives

Given the degree of conflict between objectives and the levels of autonomy and accountability of management, performance can be enhanced the more closely it is related to incentives. From this perspective the three problems which face a parastatal are to attract labour, to retain it and to get it to perform. Workers choose firms having assessed the total remuneration packages and other non-financial characteristics of the contracts, though it is common to anaiyse the decision as though the levels and structure of the wage scales addressed the questions of recruitment and retention, while performance incentives secured effort. Changing the proportion of basic wages to performance bonuses may well change effort. It may also change the composition of those who offer themselves for hire and the level of labour turnover. Here, however, we simply review the extent to which parastatals use such schemes.

The DEVPOL is circumspect about these devices, merely saying that it is the intention to ‘introduce a new set of terms of service . . . including salary reviews which will be related to the performance review for each organisation . . . (and) a new monitoring system based on productivity analysis . . . and ultimately, performance incentive schemes’ (DEVPOL, p. 155). These changes are intended to apply to commercial and quasicommercial parastatals, and they seem to mean that salary scales will be related to firm performance - which currently is true only for Cold Storage - but that individual or group incentive schemes are in the future.

All parastatals have indirect performance incentive schemes in that promotion is based on past effort - but ADMARC and ESCOM require appraisals before grant- ing increments, and AM, BWB and MHC will give accelerated increments for particularly good performance. MR has a limit merit pay scheme reserved for senior staff, and BWB would like permission to introduce shorter salary scales with discretionary bonuses at the top end. AM is still pondering the practicalities of a full scheme based on job descriptions while MHC expects to end up without one - using the civil service salary model. ADMARC have attempted to circumvent the restrictions of the civil service model by putting its senior managers on a contract scheme, and this device is now widely used in the parastatal sector. Although it can be difficult to construct performance incentive schemes, in general because of asymmetric information and in particular for jobs where there is no discrete unit of

’ The price distortion result for this sample of parastatals is not inconsistent with the World Bank (1983, Chapter 6) study on distortions in the prices of foreign exchange, capital, labour and infrastructure services, which assessed Malawi are having by far the least distorted price system amongst a sample of 31 developing countries. Our distortion index is for the output prices of the SOE sector.


output, it is always possible to create less specific versions using division or overall company performance as the indicators. Also, in-kind benefits, which are extensive for senior staff, can reinforce monetary payments. However, it is clear from Table 4 that companies have little scope to alter the remuneration package, and this has led to problems in retaining certain types of staff, for example accountants. As Lindauer (1991, p. 831) put it: 'The central issue is creating pay policies which satisfy both the parastatal's need to secure required labour and the government's wish to check the potential for public enterprises to offer excessive compensation levels.' Malawi has avoided the worst excesses of ignoring the effects of incentives for the public service - what Klitgaard (1989) terms incentive myopia - but the problem of maintaining a highly motivated workforce of the appropriate skill mix in the face of extremely detailed central intervention remains (Hirschmann, 1993).

4 CONCLUSIONS

The Malawian parastatals we have studied are all subject to multiple principals. This has sometimes led to conflicting or unclear objectives: sometimes the parastatal is given conflicting objectives by a single principal. All face at least one such trade-off. In some cases the parastatals have adopted institutional arrangements, from active boards of directors to corporate plans, to resolve disputes between the interested parties. But in all cases intervention is multifaceted, and non-commercial constraints have been imposed. Except in a few cases the parastatals have not closely followed, or been allowed to follow, the types of reform agendas suggested either by theory or by international agencies. '" We isolated the issues of consistent objectives, autonomy, accountability and performance indicators as being crucial to improved performance. We argued that, contrary to the expectations of some writers, management did not abandon objectives which could not be entirely attained. We argued that managerial autonomy is of the most limited type, and while there is increased pressure for commercial results there is little scope for the use of commercial judgement. Managerial rewards are not in the main related to commercial performance, and the degree of managerial accountability for performance is limited. In exploring the likely determinants of SOE performance we developed a qualitative technique to assess their relative effectiveness, based on the decision-making environment in which they operate. We showed that all Malawian SOEs had demonstrated some ability to respond to changed commercial pressures, if only in their ability to reduce labour costs. But we also showed that, despite the fact that they operated on output markets with only a moderate degree or price distortion, they were all some considerable distance from the ideal framework in which to achieve technical and economic efficiency.

'" The exceptions are ADMARC and Air Malawi, which have been forced to reduce their staff-in the case of the latter by SO per cent -and are introducing wage systems based on more competitive schemes, and ESCOM which is now introducing tariff structures based on long-term marginal cost.


APPENDIX PARASTATALS COVERED IN THIS STUDY

Agricultural Development and Marketing Corporation (ADMARC)

ADMARC provides 1400 permanent and seasonal markets for small-holders, where they, in principle, have been able to sell their crops at prices fixed at the start of the planting season. It has only been a monopoly buyer for small-holder cotton and tobacco, but has become involved in the ‘buying, transporting, storing, clean- ing, grading, milling, shelling and arranging for domestic sale or export of some 16 different commodities. Private traders play an important role only in certain crops such as rice’ (DEVPOL, pp. 27-28).

Air Malawi

Air Malawi is the national flag carrier, and its routes constitute an important part of the Malawian transport network. It proves domestic air services for passengers, freight and mail; flights to neighbouring countries; representation for other airlines; travel agency facilities and technical services including repair and maintenance. At the time of the study it had a fleet of four aircraft and employed 845 staff. In 1993 part of the company was sold to Press Holdings, Malawi’s main holding company, which is owned by the Life President, Dr Hastings Banda.

Blantyre Water Board (BWB)

BWB supplies drinking water to an area of 150 square miles in and around Blantyre. Apart from pumping and treating water the company’s activities include the installation and maintenance of the delivery network and water meters, and sampling and analysis of the product. At the time of the study it had 514 permanent staff.

Cold Storage (Malawi)

This is a wholly owned ADMARC subsidiary which buys, transports and slaughters cattle and other livestock. It runs abattoirs in Blantyre and Lilongwe and is the main source of beef, pork, mutton and meat products to the urban area. It also markets fish and produces hides and skins not just from the animals it slaughters, but also from crocodiles. It is the only authorized exporter of hides and skins, and this has long been its most profitable line. At the time of the study it employed 625 staff.

Malawi Electricity Supply Commission (ESCOM)

ESCOM accounts for 85 per cent of the country’s installed electricity-generating capacity. Electricity accounts for 43 per cent of commercial energy consumption, but for only 3 per cent of total energy consumption. Eighty-five per cent of ESCOM’s capacity is based on hydro generation, the rest being either gas turbine


(9 per cent) or diesel (6 per cent), all of which are within an interconnected system. In 1986 ESCOM had 2100 employees.

Malawi Housing Corporation

This organization, which had more than 800 employees in the early 1980s, was set up in 1963 as a self-accounting corporate body to undertake, on a commercial basis, the development, construction and management of houses and housing estates in urban areas and regional and district centres throughout the country. By the late 1980s it administered about 10,000 dwelling units and over 40,000 Traditional Housing Area ‘site and service’ plots.

Malawi Railways

Malawi Railways employed 5431 people in 1983, but early retirement and two waves of redundancies had reduced this to 4400 at the time of the study. The crisis in Mozambique reduced freight traffic from 1.3 million tons in 1975 to 0.4 million tons in 1985-86, and placed severe financial strains on the company. We estimate that between 1980 and 1987, despite some success in attracting a higher proportion of domestic freight, the rupture in external traffic led to a 57 per cent deterioration in the effectiveness of wagon usage (Lawson, 1989a). After the fieldwork period part of the company was sold to LONRHO.

Small-holder Tea Authority (SHTA)

This organization was established in 1967 with the task of promoting and support- ing the growing of tea in the Thyolo/Mulanje area. This is the only known viable cash crop in this most densely populated area of Malawi. The 5000 small-holdings cover a wide geographical area and exist either on customary or on public land. The latter is land which has been bought back from large-scale commercial concerns and returned to small-holder use. The SHTA has major infrastructural investments in roads and leaf-sheds, and also provides inputs and extension services, transportation, processing and international marketing. It has 500 permanent staff, and also hires considerable numbers of casual labourers.

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The efficiency and effectiveness of Malawian parastatals

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