Introduction
A Government owned business is where the government either directly or indirectly owns a share in a business enterprise.
This is a phenomena mostly found in socialist economies and in developing countries of Africa, Asia, Far East and Latin America.
Public Enterprises are also found to a lesser extent in developed economies of Europe.
In the United States of America and Western Europe, the government regulates economic activity and operations of business and industry.
However, ownership and control rests mostly in private enterprises except organizations dealing with products for use by national defense and strategic resources.
Our discussion will be centered on the type of government owned enterprises from a Kenyan perspective.
Need for Public Enterprises
In developing countries, government enterprises have been encouraged due to the following reasons:-
§ National policies of equal distribution of national resources
§ Attainment of social policy goals such as creation of employment
§ Economic policies of Stabilization of commodity prices.
§ National policies to distribute national wealth among citizens
§ National policies to spread development to all areas of the country.
Reasons for Government Enterprises
Government enterprises are established due to the following reasons:
a) Abolition of monopoly by private enterprises. Ownership of business enterprises rests in the state; private monopolies will cease to have too much power over the happiness and destinies of majority of the population.
b) Replacement of profit motive by consideration of public welfare. Private enterprises work with an eye on profit and judge every issue from the point of view of profit.
c) Greater economy and co-ordination. State enterprises ensure harmony and co-ordination.
d) Balanced regional development. Decisions regarding location of new plants are taken in regard to social and regional considerations so as to spread development in every part of the country.
e) Assistance in economic developments. The surplus profits of state enterprises can be used to finance schemes of national economic developments. This will reduce the need of heavy taxation for the purposes of financing development.
f) Better conditions of employment for workers. The state being a representative of the people will naturally be interested in providing a better deal to workers so that exploitation, job uncertainty etc. can be replaced by just rates.
Reasons against Government Enterprises
The following are the demerits of establishing government enterprises:
a) Lack of Efficiency. State enterprises are generally presumed to be less efficient than privately owned and management concerns.
b) Lack of flexibility in operation. There is usually lack of flexibility in operations of state enterprises since they will have to stick to the provisions of the Special Act of Parliament establishing such enterprises.
c) Political interference. State enterprises are prone to frequent undue interferences by political parties and their leaders.
d) Exposure to public Censure. State enterprises are exposed to the critical eyes of the general public. Therefore persons in top management of such enterprises may not feel free to initiate new schemes or venture on untried policies.
e) Rigid Financial control. State enterprises are subject to strict and rigid financial control by government auditors and parliamentary committees.
Organization of State Enterprises
State or public enterprises are normally organized in three forms:-
a) As departments of government
b) As public or state corporations
c) As mixed ownership corporations or companies set up under the companies Act Cap 486
Government Department
State enterprises which are managed as part of a government department usually follow the traditional functions government.
They are managed as a department of a government ministry and have the following characteristics.
a) The enterprise is run by a Government Ministry with the Minister at the top responsible to parliament for its operations.
b) The day to day operations are managed by a Board of Directors assisted by a CEO all appointed by the Minister.
c) All other staff is recruited the same way as other civil servants.
d) State enterprises are financed by annual appropriations from the treasury and estimates of expenditure and revenue shown in the national budget. All revenue or major portion of it is remitted to the Treasury.
e) The budget, accounting and audit controls applicable to other government activities apply to these enterprises.
f) They produce largely for the state itself
g) Such undertaking cannot be sued at law without the consent of the government – Government proceeding Act.
Limitations of Departmentally Run State Enterprise
a) They are usually at the mercy of political parties and lack stability due to uncertainty of tenure of political parties and Ministries.
b) Such business activities are financed by tax payers rather than the users of goods and services.
c) Civil servants entrusted to management such enterprises lack business acumen or expertise.
d) Such enterprises leave no scope for initiative and skill as minor details of their working are objects of scrutiny and questioning in parliament and outside
e) Lack flexibility of operations necessary in business activities they become synonymous with red-tape delays, inadequate service and insensitivity to consumers needs.
Public Corporation/Parastatals
Public corporations, also known as parastatals, are statutory bodies formed and owned by central government.
They are established to perform specific duties or functions with the main objectives of providing goods and services to the public.
In Kenya, their activities are found in such places as transport, communication, financial and management services, production and marketing.
These are goods and services considered to be too essential to be left to the private sector or require heavy initial capital investment, which very few private investors can afford.
Although the main objective is not profit driven, parastatals have to make a profit margin to sustain their operations.
Features of Public Corporations
i. They are established under an Act of parliament
ii. They are formed, owned and operated by the central government
iii. The government is the main provider of capital
iv. Management and decision making are in the hands of director appointed by the government
v. They are set up to perform specific functions on behalf of the Government, For example: Marketing boards are set up to help in the production and marketing of certain products.
vi. Most of them provide goods and services to the public at marginal profit to sustain their operations.
vii. The profit is used to improve services to the public as well as provide revenue to the Government
viii. They are established as legal entities with the ability to enter into contracts, own property and can sue and be sued
4.8.2 Formation
Most public corporations are established through Acts of Parliament (while others are formed under the existing laws e.g. the companies Act. Through very rarely)
A parliament bill seeking the establishment of the parastatal is published and presented to parliament.
If passed the bill becomes an Act, which serves the same purpose as the Memorandum of Association and the Articles of Association in limited companies.
The enactment of the law gives the corporation legal entity and limited liability. The Act outlines:
i. The proposed name of the parastatal
ii. Aims and objectives
iii. Goods or services to be produced
iv. Location
v. The appointment of top executives.
vi. The power of the board of directives
vii. The ministry under which it will operate
Once the bill has been enacted and becomes law, the registrar of companies issues a certificate of incorporation
The minister then appoints the management board and the corporation starts operations.
4.8.3 Ownership
The citizens of the country apparently own parastatals with effective power resting on the hands of the management board.
The central government provides all the share capital hence owns all the shares in a parastatal.
4.8.4 Management
The management through the minister responsible appoints the top management board of public corporations.
A management director heads the board of directors whose responsibilities include:
- Formulating and implementing the policies of the organization
- Reporting the corporation’s progress to the minister who in turn reports to parliament.
4.8.5 Capital sources
The major source is the government, which buys all the shares of the parastatal from the tax collected. Other sources include:
- Borrowing from banks and other lending financial institutions. However, the power to arrange for loans and overdrafts from banks is subject to control by the government.
- Hire purchase arrangement. The corporation can arrange to buy some of the property it requires on higher purchase terms by pay in installments.
- Trade credit. Credit facilities with suppliers to supply goods or services on credit and pay later can be arranged by the parastatal.
- Renting and leasing. The corporations can rent or lease its unused property to other business organizations from which it collects some revenue.
- Ploughing profits. Most of the profit made by a parastatal is ploughed back into the corporation to improve and expand its services to the public.
4.8.6 Types of Public Corporations
Public Corporations can be classified according to their functions as follows:
- Trading and Commercial Corporation
These are parastatals established with the main aim of engaging if business to provide goods and services with the aim of making profit.
A certain proportion the profit goes to the government in the form of dividend while the balance is retained for expansion and improvement of services.
They can also be divided into two categories:-
a) Those that are monopolistic. These encounter no competition in the goods and services they provide.
Examples include the Kenya Power and Lightning Company, Kengen, Kenya port authority, KARI.
b) Those that trade in competition with other privately owned business organization, Examples include the National Housing Corporations, the Kenya Pipeline Company and the Industrial and Commercial Development Corporation (ICDC), the Kenya National Trading Corporation.
- Marketing Boards
These are public corporations established by the government with the main aim of assisting local farmers in marketing or selling their produce at the best prices possible.
They have the following functions:
a) Collecting, transporting and packing the produce from the farmers.
b) Primary processing, grading and packing of produce as seen fit.
c) Searching for both local and international markets for the produce.
d) Selling the produce on behalf of the farmers and submitting the benefits to them
e) Assisting farmers to produce the best quality produce by providing credit facilities for agricultural inputs and extension services.
f) Undertaking research on agricultural marketing, problems that face it and possible solutions.
g) Stabilizing prices and incomes by keeping prices fairly fixed and storing any unsold goods to act as buffer stock i.e. to be sold during an emergency.
Examples of these boards include: Kenya National Cereals and Produce Board, the Coffee Board of Kenya, the Pyrethrum Board of Kenya and the Cotton Lint and Marketing Board
- Finance and Banking Corporations
These corporations are established to serve the following purposes:
1. Provide banking services to the public.
2. Earn revenue for the government
3. Mobilize funds from the public and channel them to investment and economic activities;
4. Support trade, industry and other national development activities by providing loans and other financial services to them.
Examples include; the Kenya Post Office Savings Bank, the Industrial Development Bank, the Agricultural Finance Corporation, the Kenya Industrial Estates and Industrial and Commercial Development Corporations
- Research Corporations
These were established to provide research services to support the development industry, agriculture, health and other specialized sectors of the economy.
Examples include : the Kenya Coffee Research and Development Institute, the Kenya Medical Research Institute and Kenya Forestry Research.
- Development Corporations
These were set up for the main purpose of developing specific regions of the country that were considered to be economically unproductive but had the potential of being economically productive.
Examples include: the National Irrigation Board, the Lake Basin Development Authority, the Tana River Development Authority and the Kerio Valley Development Authority.
- Regulatory Corporations
These were incorporated to establish and control standards and quality of specific goods and services and determine the direction of development of the sectors they represent.
Examples include: the Kenya Bureau of Standards, the Kenya Electricity Regulations Board, the Communications Commission of Kenya and the Kenya Film Corporation.
- Service Delivery Corporations
They are established to provide certain specialized services of national importance. Examples include: the Kenya National Examination Council and Kenyatta National Hospital
4.8.7 Advantages of Public Corporations
i. The goods and services at affordable prices
They consider the interest of the public when determining prices of their goods and services since their main aim is to provide affordable goods and services.
ii. Government Support
They enjoy government support when in financial crisis and government backing (guarantee) when borrowing money from banks and other sources.
iii. Provide healthy competition
Many of the parastatals provide direct competition to organizations in the private sector.
This helps regulate prices as well as quality of goods and services. Consumer prices are kept low and affordable as a result.
iv. Provide Essential Goods and Services.
Some are established to provide certain essential goods and services that would not have otherwise been provided by the private sector due to the high cost involved, their sensitivity, among other factors e.g. Water and electricity.
v. Provide revenue to the government
They are an important source of revenue to the government.
The revenue arises from:
a. Taxes such as Value Added Tax (V.A.T) collected on behalf of the government in the course of activities.
b. Corporation tax charged on the profits they make
c. Dividends which are the government’s share in the profits made
vi. Promote Economic Development
Their operations promote the exploitation of the country’s economic resources leading to economic development and improved standards of living of the people
vii. Provide employment
They generate employment for the public hence help in improving standards of the living.
viii. Control of the development of various sectors of the economy through public corporations, the government is able to control and direct the development of the various sectors of the economy.
ix. Ability to hire and employ highly specialized labour force.
4.8.8 Disadvantages of Public Corporations
i. Lack of Profit Motivations
Their main objective is to achieve government objectives.
The lack of profit motivation leads to inefficiency and complacency in management leading to loss making.
This situation is worsened by the belief that the government will step in to save them from collapse.
ii. Poor Management
Most parastatals suffer from poor management practices. It may result from:
a) Lack of profit motivation.
b) Appointment of poor top level managers who are unqualified for their positions
c) Political interference
d) Corruption that has often led to collapse of parastatals
iii. Excessive Government control
The government controls their operations and where such control is excessive, the management cannot make sound business decisions, especially when they appear to be in conflict with perceived government policies.
iv. Political influence and interference
Since most senior positions in parastatals are political, they tend to suffer from political pressure and patronage in the leadership, which undermines expected professional management of the corporations
v. Lack of competition
Some parastatals are monopolistic thus encounter no competition from the private sector.
As such they tend to be inefficient in their operations, insensitive to the needs of customers and provide poor quality goods and services.
This may lead to consumer rejection and eventual collapse.
vi. Heavy burden on government resources
The government is obliged to provide goods and services to all citizens regardless of the geographical location.
Sometimes it becomes uneconomical to provide some goods and services to some areas.
The cost of providing them may surpass the returns.
vii. Corruption
Public corporations suffer from problems of inefficiency, laxity, political interference and poor management that are all fertile ground for corruption and financial management.
viii. Lack of interest and commitment by the directors and managers.
Top directors and managers of parastatals are merely appointees and not owners of the organizations.
As a result they lack interest and commitment to make sound economic decisions that may be necessary to generate profits.
4.8.8 Dissolution of public corporations
The life of a parastatal can come to an end or be dissolved through any of the following:
i. By the voluntary action of the government through the minister responsible
ii. By action of the creditors
iii. By compulsory action of a court of law.
Each of the cases above, the procedure followed is the same as in the dissolution of limited companies.
The life of a parastatal can also end through the sale of all its shares to private investors.
The process is known as privatization. It only involves a change in the ownership, management and control of the corporation. Its complete dissolution is not required.
4.9 Privatization
Privatization is a transfer of ownership and control of an enterprise, through the sale of assets, from the public to the private sector.
Since loss-making public enterprises have been a drain on government resources, governments have resorted to privatization as a cost saving device.
Many of the countries that have adopted IMF- supported adjustment programmes have had to examine their strategies for dealing with public enterprises, particularly in the area of need to cut down on the government expenditures.
In a number of cases, privatization has been considered a viable strategy.
These are three basic forms of privatization:
i) Government relinquishes any interest in a public corporation by selling all its assets to private entrepreneurs;
ii) Private entrepreneurs are invited to participate in a joint ownership of an enterprise that has been wholly owned by the government, thereby changing its status to a quasi-public enterprise;
iii) The government sells all the equity it owns in a quasi-public enterprise, making it wholly private.
-Privatization is based on the premise that private enterprises are more efficient than public ones.
Thus its objective is to improve the efficiency of enterprises.
It is assumed that private ownership increases managerial accountability by making the managers responsible to shareholders who, it is believed, are more inclined to monitor their performance more effectively than governments; subjects managers to the financial discipline of private capital markets; and enhances competition and the associated improvements in allocative efficiency.
-The conventional viewpoint that parastatals are more protected but less efficient than private firms was challenged by Grosh (1988).
Grosh analyzed data on sample of public and private manufacturing firms in Kenya and found that parastatals in her sample were relatively more efficient and less protected than private enterprises.
However, until more studies confirm these conclusions, they should be regarded as only tentative.
Mixed Ownership Corporations
In such corporations or companies the government usually owns less than 51% share capital.
The rest is owned by members of the public or private investors or other large private corporations.
In mixed enterprises, the state has an opportunity to associate the investing public with their capital and technical know-how.
Features:
- No state interference
- No bureaucratic control operation of business
- The organization is not run for welfare purposes but as a profit making venture
- No government auditors – it is usually audited by private professional auditing firms.
- It is normally efficient in operation
- Recruitment is from the labour market
- The Board of Directors is elected at annual general meeting.
Activity 4.1
1) State three objectives of state corporations
2) How are state enterprises organized?
