Inefficiency of state-controlled enterprises

Government owned and run enterprises are notoriously known for bureaucratic constraints, lack of investment incentives, pricing controls, centralized decision making, and restriction on hiring and firing workers. Control of businesses by government bureaucracies or by legislation is at best done in the context of the needs of the whole nation and at the worst in the context of personal ambition leading to wide spread corruption. In either case decisions are slow and unresponsive to the needs of the company. Profits often revert back to the government creating disincentives for management and labour to work more profitably. Investments are frequently insufficient. Price controls coupled with rising costs of labour and raw materials make unit costs high than prices, discourage efficient running of the company. Employment practices are dictated by political considerations rather than what benefits the corporation. Management jobs are often dependent upon approval of government overseers further eroding concern about effective business practices.

Where commercialization or demonopolization of public enterprises are planned by policy-makers as intermediate steps towards privatization, it may be difficult to maximize the efficiency of such enterprises because of lack of motivation of workers and management who know that privatization is the ultimate objective. It may also be difficult to undertake extensive reforms whose costs may not be recouped in the sale price of an enterprise.

[Developing countries] In almost every developing country the public sector undertakes a significant share of its production and investment through state-controlled enterprises. In the past their budgetary deficits have often been hidden by a lack of consolidated financial data, opaque budgetary procedures, extra-budgetary financing, implicit subsidies and protection from competition. More recently tight budget constraints, limits on domestic and external financing, and the effects of devaluation and trade liberalization have exposed the weakness of their finances and their negative effects on the fiscal stability of developing countries. Their contributions to rising public sector debt and growing foreign indebtedness are increasingly recognized as key issues in public finance.

[Industrialized countries] More than £23 million were lost through negligence and mismanagement of prison enterprises in the UK in 1985. There was concern in that case to distinguish between "limited efficiency", which is seen as desirable, and "inefficiency and neglect", which is what took place. Britain's private sector steel industry was complaining in 1992 of unfair competition and market distortion resulting from state-controlled steel enterprises in the EEC/EU.