Chapter 1.

2 PUBLIC ENTERPRISES
Public Enterprises may be defined as autonomous or semi-autonomous
bodies owned by the government and engaged in providing services and
or products.
The growth of public enterprises has been partly by nationalization and
partly through creation of new ones. Some industries are also reserved
for the public sector as a matter of national policy. Such industries could
be airways, defense industries, railways, telecommunication and the like.
The need to have public enterprises may be justified on a number of
grounds:
 Limitation of the free price mechanism
It is realized that in spite of all its advantages, a free price
mechanism had serious limitations which had to be overcome in
the long term interests of the economy. An economy can not
sustain itself and grow unless it is healthy in terms of production
potential which should increase with the passage of time that is
development of different economic sectors in harmony or proper
sectoral balance. However, the nature of market mechanism is
such that all economic activities are guided by economic
rationalism which in the case of provision of products or services
means profitability. Market mechanism would refuse to run those
productive services which could not yield adequate profits. But
such ventures are necessary for the development of the economy.
The public authorities thus maintain these projects at a loss and
meet the loss from their tax revenue.
 Basic industries need huge investment
Private enterprise is either not able to raise the necessary funds or
not ready to assume such large risks. In such cases, even if these
enterprises could possibly be profitable, the government has to

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 step in to establish them. Cases of very long term projects also
come in this category.
 Government’s duty to help in economic development
Such a policy entails a number of responsibilities and some of
these results in the governments going in for various types of
public enterprises. In an underdeveloped country, additionally, we
find that there is an overall shortage of capital. It becomes,
therefore, the task of the authorities to assume the responsibility
of filling the gap and thereby removing the specific shortages. The
role of basic and key industries which provide an impetus and
necessary basis for the general economic development may also be
mentioned in this connection.
It is not very likely that the private sector which moves solely on
the basis of profit motive, will find it always convenient to move
ahead and establish these industries in time and adequate
measure. The private sector would find it easier and more
profitable to expand at a rapid rate once basic inputs like skilled
human resource are created through education and training.
 Creation of economic surpluses and their utilization
A number of public undertakings directly add to the capital assets
of the economy in the form of roads, bridges, factories and the like.
They are, in so far as they are not in the public sector by virtue of
nationalization only, net additions to the capital stock of the
country and, therefore, they contribute to its total productive
power. Such an addition might also result from utilization and
exploitation of resources which were hitherto going waste; or from
change in the allocation of resources. Public enterprises can also
help the economy a lot by diverting its productive resources into
those lines which will accelerate the growth process later through a
provision of an infrastructure, basic and key industries and so on.

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 Final choice of projects are made in the interest of the economy as
a whole
If social benefits exceed social costs in the case of any service, then
its production should be taken up. But it is possible that on
grounds of social benefits some projects are sound but not on
grounds of commercial profitability. Under such circumstances,
these projects can be taken up by authorities in the public sector.
 Limitation on demand of merit goods on account of price if left in
private hands
Merit goods are those expected to enhance the general welfare of
the community and should be provided through public enterprises
either along with public enterprises or in place of it. It is generally
believed that the supply of such services should be adequate and
should be available at low or zero prices so as to encourage their
consumption. In case of education, the government may not only
provide it for free but also insist that all children up to a certain
age must attend schools.
 The overall economic policy of a country may dictate the use of
public enterprises in some sectors
There are some industries like electricity generation where there
are economies of scale. If such services are provided by a large
number of firms competing with each other, it wouldn’t be possible
to reap these economies. Authorities may, therefore, think it more
desirable to have a public monopoly than private monopoly for
such services.
 Effective economic control of the economy
Effective economic control of the whole economy is sought to be
brought in the hands of the state. In other words, the argument of
not letting the emergence of a monopoly in private hands is
extended to the whole economy. The authorities might plan to have

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 a strategic control over the working of the whole economy through
controlling certain key sectors.
 Better protection of natural resources
In the case of some natural resources like forests, mines and the
like, the commercial interests of a private enterprise often come
into conflict with those of the nation. A private jungle contractor
authorized to cut trees is likely to make a quick profit by cutting
down as many trees as possible. This may result in a large scale
and quick denuding of the land causing soil erosion and upsetting
the ecological balance.
Forms of Public Enterprises
The enterprises which are not run on departmental basis have, in
general, two forms. One is as a firm or company owned and controlled
by the government and functions under the same laws of the country
as private firms or companies of similar type.
Another form of public enterprise is what may be called the public
corporation.
 Public corporations are
o Set up by legislation which defines:
 Sphere of activities
 Rights, immunities
o Artificial legal persons
o Can take independent decisions
o Can sue and be sued
o Have their own personnel policy, management pattern and
the like
o Can retain and reuse their funds according to adopted policy

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PROCLAMATION NO 25/1992
Proclamation No 25/1992 is a legal provision governing establishment
and operation of public enterprises in Ethiopia. The public enterprises in
Ethiopia include those nationalized and established afresh by the
government over the years. As per the proclamation a public enterprise is
defined as a wholly state owned enterprise established pursuant to the
proclamation to carry on for gain manufacturing, distribution, service
rendering or other economic and related activities.
According to the proclamation:
 Every enterprise shall be established by regulation and the
establishment regulation shall contain:
o The name of the enterprise
o A statement the enterprise shall be governed by the
proclamation
o The purpose for which the enterprise is established
o The authorized capital
o The amount of initial capital paid up both in cash and in
kind
o A statement that the enterprise shall not be liable beyond its
total assets
o The head office of the enterprise
o A statement that may authorize the enterprise to open
branches
o The name of the supervising authority
o The duration for which the enterprise is established
 Each enterprise shall have:
o A supervising authority
o A management board
o Management
o Necessary staff

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 A supervising authority is an authority that is designated by the
Council of Ministers with a view to protecting the ownership rights
of the state.
 Each enterprise shall keep accounts as per GAAP
 Financial year of the enterprises shall be determined by the
supervisory authority
 Each enterprise shall have a Legal Reserve Fund
o 5% of net profit transferred annually to L-R-F until the fund
equals 20% of the capital
o The fund may be utilized for covering:
 Losses
 Unforeseen expenses and liabilities
o The board of the enterprises, upon approval of the authority;
may establish other funds
 Taxes and Duties
o Shall be paid as per relevant provisions of applicable laws
 State dividend
o The amount to be paid to the government in the form of state
dividend shall be determined by the supervisory authority
based upon proposal of the board