Reform of the SOE sector has long been seen as one of the most important challenges since the reform began. Two most crucial reforms of the SOEs lie in the incentive system and property right system. The former has long been the centre of SOE reform, but the latter has now started to draw much attention of economists and reformers.
A key to the reform of incentive system is to give enterprise a main role in the market economy. Unless enterprises attain full autonomy, the necessary incentive and sufficient capability for competition will remain elusive. In order for enterprises to attain full autonomy, the adjustment of autonomy in terms of personnel and investment rights is indispensable. In essence, reforms are taken to improve the management of SOEs. The following is an analysis of the management situation of SOEs under different system through out the reform process.
6.1 Basic situation of management systems of SOEs
Since the beginning of the reform in 1978, two major systems of management have been employed for the mainstream of SOEs. These systems are factory system, corporate system (shareholding system as the main form). From factory system to shareholding system there has demonstrated an evolution trend.
The factory system includes manager responsibility system, contract system and leasing system. Enterprises under this system are managed based on the State-owned Enterprise Law (1988) and the Autonomous Management Right Regulations (1992).
The state assets of these enterprises are managed based on the Regulations Governing the Supervision and Management of State-owned Enterprises’ Property (1994).
The corporate system consists of state-owned limited liability company, limited liability shareholding company and wholly state-owned company. Enterprises under such system are basically subject to the Company Law (1993). Since the mid-1990s, SOEs have increasingly shifted towards the shareholding system.
According to OECF’s investigation, at the end of 1995, the nationwide
distribution of the management system of SOEs was as follows.
Table 6.1 Distribution of the system of management of the SOEs (unit: number of enterprises, %) Type of enterprises Number of enterprises (overall
percentage)
From the mid-1980s to the mid-1990s, the most popular system of management was the factory system. Until now it is still the most widely-used system of
management although corporate system becomes increasingly popular and largely promoted from the mid-1990s and afterwards. But there is a trend that corporate system of management will eventually take over the factory system and be used as a dominant system of management for the enterprises. The result of OECF’s survey of 796 SOEs demonstrates that the enterprises under the corporate system have grown from 0.1% in 1991 to 5.7% in 1995. The increase of corporate management
enterprises is more rapid after 1995. The number of state-owned limited liability companies is increasing most rapidly. Problems and challenges appear in the factory management system as well as the transition from factory system to corporate system.
6. 1. 1 Key Feature of factory system SOEs
The important feature of factory system enterprises is the factory manager/director responsibility system, which is an extended version of the
contracting and leasing systems. As stated in the State-owned Enterprise Law (1988), under the factory system, ‘the factory manager exerts official power and receives legal protection’ and ‘the factory manager is the legal representative of the enterprise and takes full responsibility for the construction of the physical and mental
civilization of the enterprise.’ Under the Law, the factory manager is authorized to do the following (based on OECF 1998: 123):
1. Decide on the plans of the enterprise or apply for plan approval based on the relevant regulations of the State.
2. Decide on the establishment of the administrative organization of the enterprise.
3. Propose appointment and dismissal of managers at the deputy factory manager level to the supervisory authorities of government.
4. Appoint or dismiss medium-level management.
5. Submit important proposals on provisions relating to wage revision, distribution of
bonuses, employee welfare, etc. And request discussion and decision at the employees’ congress.
6. Reward and punish employees based on the law, and propose rewards and punishments for deputy factory managers to the supervisory department.
In all, the factory manager is granted the right to occupy and use state properties whose management is entrusted by the state and to dispose of them accordingly.
When it comes to the management autonomy of enterprises, the Enterprise Law provides the following 13 autonomies (OECF 1998: 123):
1. Independently determines the production of the products and services.
2. Has the right to request adjustment of directive plans when necessary supplies and sales of products are not secured, and has the right to accept and refuse production outside the directive plans.
3. Independently chooses suppliers and purchases input goods.
4. Independently determines the prices of products and service.
5. Independently markets the products of the enterprise concerned.
6. Negotiates with foreign enterprises, observing the provisions of the state council, concludes contracts, reserves and uses a prescribed percentage of foreign currency income.
7. Controls and uses reserved funds according to the provisions of the state council.
8. Leases or transfers fixed assets for consideration based on the provisions of the state council. In this case, the manager is required to use the profits for the renovation of facilities or technological innovation.
9. Determines the form of wages and the distribution method of bonuses as according to the condition of the enterprise concerned.
10. Employs and dismisses workers in conformity with the laws and the provisions of the state council.
11. Determines the establishment and the number of staff of the organization.
12. Has the right to refuse any requisitioning of personnel, goods, funds, etc. By another organization.
13. Has the right to have associated management with other enterprises or business units, investment in other enterprises or business units, and o hold the stock of other enterprises in conformity with the laws and the provisions of the state
council. Has the right to issue bonds based on the provision so f the state council.
But these rights were not fully granted to enterprises due to various factors.
Some limitation of the provisions made operation difficult. In response to this, in 1992 the Autonomous management Right Regulations was promulgated as a law
which is the concrete form of the Enterprise Law. This law grants enterprises 14 autonomies as follows OECF (1998:124).
1. The right to decide on production;
2. The right to decide on the price of products and services;
3. The right to decide on independent sale of products;
4. The right to decide on the selection of suppliers;
5. The right to decide on foreign reserve funds;
6. The right to decide on investment;
7. The right to the use of reserve funds;
8. The right to decide on the disposal of assets;
9. The right to decide on joint operation and mergers with other units;
10. The right to decide on the hiring and firing of employees;
11. The right to decide on personnel management;
12. The right to decide on the distribution of wages and bonuses;
13. The right to decide on the organization of internal division;
14. The right to refuse requisition.
Among these autonomies, the rights to decide on the disposal of assets and to decide on personnel management are still difficult to operate. The core problem is the extent to which the State as an owner of the state-owned enterprises’ propertied should reserve control over personnel management and the disposal of assets. There is an on-going debate over this problem because there is ambiguity in the relationship between the management autonomy and the property ownership of the State. Thus, abuse of management autonomy by enterprises existed at the same time as the lack of management autonomy. In order to improve state property ownership, the Regulations Governing the Supervision and management of State-owned Enterprise’s Property was promulgated in 1994 (Supervision Regulation later) (OECF 1998). The
Supervision Regulations specifies the concept of the corporate property rights of the enterprises and provides that ‘enterprises have corporate property rights and
independently control properties where the management is entrusted to the State based on the law. The government and supervising organizations should not directly control the corporate property of the enterprises.’ However, the concept of ‘corporate property rights’ is confusing with its emergence in the Regulations. This leads to current top issue of property right.
In the Enterprise Law, the management right is defined as the right to occupy, use and dispose of property based on the law whose management is entrusted to the enterprise by the State. It provides that the government sector has the right to decide
on directive plan and the examination and approval of investments and allows that the State has the right to the partial use of the enterprises’ property. It also provides that the enterprises have the right to autonomous control over retained profits and allows the enterprises the right to partial receipt of income. Clearly there are defects in the definition of the management rights since the management rights is actually regarded as administrative management rights. There is not an accompanying change in the relations of property rights. Being specific forms of the Enterprise Law as well as two major regulations controlling the factory system enterprises, both the ‘Autonomous Management Right Regulations’ and the ‘Supervision Regulations’ do not solve all problems of SOE management while some new problems emerge in the process of their implementation. The autonomy is not granted easily or just a transfer of the administrative management right while the State’s property right does not have substance. This leads to absence of the real owner of state assets and problems of insider control due to poor monitoring. As the enterprise’s right is limited in the disposal of assets and personnel appointment, there still exists the bedrock for government intervention. The enterprise management neglects the increase in assets value and development of the enterprise. Instead enterprises more often than not put their focus on securing profit transfer and employees’ income (OECF 1998).
6. 1. 2 Major problems under the factory system:
There are three major problems of the factory system. The biggest one is the severe outflow of state assets; the second one is the poor management performance of state assets; the last one is non-economies of scale -too many too small enterprises and large enterprises are not large compared internationally.
The biggest problem resulting from the factory system is the critical condition of the outflow of state assets. OECF (1998) defines two kinds of outflow: the outflow in a narrow sense is the free conversion of state-owned assets to non-state-owned assets.
The outflow in a broad sense includes, in addition to the narrow sense outflow, loss caused by inefficient management. ‘The amount of outflow is huge, its form is diversified and the number is increasing’.
The forms of state assets outflow include (based on OECF 1998: 133):
1. Contracting is only for profits and, enterprises or managers take no responsibility for loss. The state as the asset owner has to be responsible for losses. This problem especially occurs in the contracting and leasing management systems.
2. The unprocessed assets loss is considerable. This includes optional disposal of assets and purchase of new ones, extra inventory of products and raw materials left unprocessed in the accounting.
3. Unlisted income and assets are too extensive. There are many cases where the assets formed by a unit through funds offered from finance have not been included in the books, fixed assets which have already been used by the enterprise have not been included, or assets transferred to a collective ownership system enterprise have not been included.
4. Non-state owned enterprises (especially the collective ownership enterprises) occupy state-owned assets free of charge.
5. The abuse of autonomy and infringement upon the rights of the state owner are often committed by enterprises. Some enterprises invest in real estate, stock, and futures using public funds, taking the earnings if it makes a profit and passing them on to the State if it is a loss. Some enterprises make a window dressing settlement without including prescribed depreciation or deferred expenses, or give out too many bonuses.
Moreover, the poor management performance of the state assets is often demonstrated in profit declining and loss increasing, low rate of input production, increasing deficits and high ratio of debt to assets (FCLMA, 2007). In 1994, 11% of all the SOEs had liabilities which exceeded their assets (OECF 1998:133) and In 1995 this figure rose to 16.28% and the average ratio of debt to assets of all but financial SOEs was 69.27% (Liu & Gao 1999).