The Problems of Financing Government Corporations
Overview of Government Corporation Finance – Nigeria has a mixed economic system in which both the private and public enterprises exists side by side. Private enterprises are characterized by consumer governor and producer profit motive, whereas the public sector is characterized by the revenue and expenditure pattern of governmental budgeting. The need for the public sector arises because of the inefficiency of the market system in the production, allocation and distribution of economic goods and services to the citizenry. Therefore, the function of the public sector centers on allocation of economic goods, distribution, regulation and stabilization of the economy.
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The benefits of public enterprises have been categorized into political, social and pragmatic factors. Political factors he said are for the elimination of unearned and inequalities of income redistribution of National income to protect the masses from the exploitation of the wealthy who have enormous investment capital to accumulate more riches in form of monopolistic profits and to produce goods and services for the common good rather than profit motives. The social factors he further said are for investments concerns which require large investment capital which is individuals ever ends to carry would sustain financial losses of gains.
Government enterprises are described as a machinery of central or state government through which essential services for the public are provided. This description the public enterprises as very important organization of government through which she ties to fulfill its political, social and economic obligations.
The central bank of Nigeria blamed the first half of 1988 largely on the expenditure undertaken to underwrite losses in a large number of public enterprise government establishments frequently has large deficit as observed impairs the banks ability to observe overall ceiling on credit.
Government enterprises in Nigeria are described as a high drain on the nation’s resources. He said that government invested more than #23 billion (Oct 1979-Oct. 1985) which did not meet their level of expectation. Though, this assumption depends on or is said to be determined by the type of government industry involved, specifically if it is the type that is profit oriented like it may not be so but the type that is service oriented, like water corporation, which depend solely on the government for their funds them it would be the case.
However, the justification of public enterprises is not always based on economic considerations; Italy for instance has a long record, for example rescuing bank private firms by placing them under state ownership and control. This occurred under the fascist government of the 1930’s. firms thus nationalized have included many for which arguable liquidation would have been an economically more sound alternative. In Italy and elsewhere, publicly owned but economically nonviable enterprises can be sustained only by subsidization, which raises serious question pertaining to economic efficiency. Under neoclassical economic thinking efficiency is maxi zed if numerous enterprises openly, compete for sales of output and procurement of factors inputs in unregulated markets (unregulated have implies both no state regulation and on collusion among enterprises or sellers of factor inputs and if enterprises strive to maximize profits.
In a state owned enterprise, however, individual managers may feel less bound to maximize profit than would managers in a private firm, especially if the (state owned) enterprises receives subsidy by national authorities on criteria other than economic ones such a relaxation on the part of managers doubtlessly would reduce efficiency, particularly in case where the firm was subject to little or no completion. Defenders of state ownership of industry maintain, however, that public firms can confer upon the community external benefits that private firs would not take into account and which justify behaviour other than profit maximization. It is not difficult to conceive of such externalities but it is different, to quantify a trade off result from non-profit maximization behaviour.
More so, even if it were to be determined that the state owned enterprises would strive to maximize profits and not the recipient of direct government subsidies, some shielding from the competitive rigors of the market is none the less likely to ensure from the more fact of state ownership. This is typically true in his capital market it is likely to be perceived that credit wittiness of the nationalized firm is implicitly, guaranteed by the state. Thus the riskness of the state owned firm would be perceived by the market as less them that of an otherwise identical private firm, which would reduce the capital costs to the former firm. This would result in some distortion in the allocation of resources. It is possible also that state owned firms may pay higher then market wages or grant extra ordinary employment security to employees although this is not always the case. There is little evidence in British dependence to suppose that related between labour and employer are better in state owned enterprise that in privately owned ones. whatever the trade off between losses of economic efficiency and external gains that might ensure from nationalization of industry, it is clear that in the late 1970’s public sentiments in many Western nations turned away from advocacy of public ownership. In great Britain and garden, eg social democratic parties were voted out of offices in 1979 and replaced by conservative government committee to denationalization of industry.
In addition to the fore going, public enterprises may be financed in many different ways depending on their nature, objectives and the environment in which they operate. Some are wholly dependent on government for funding, but most operate between these two extremes. The task of government is to ensure that the method of financed is appropriate to the characteristics of the public enterprises, consistent with the objective set by government for the parastatals and in accordance with the economic needs of the country as interpreted by those currently holding political power. The latter point implies for instance, that parastatals treated by one political regime as necessarily dependent on government for funds may be treated by another regime as self financing.
Obviously, limitation exists to the marking of abrupt charges in the method of financing parastatals, particularly moves toward self-sufficiency. The crucial limiting factor is the preparedness of users. To pay for the goods and services supplies. Moves in the opposite direction, however, are easy to accomplish. If government supplies the money, expenditure will rise to absorb what is made available.
Further more, the method of financing a corporation originates with the entity itself. It is either newly formed from scratch or the result of nationalization of previously existing private entries. In either case, government has to decide on financial structure and method of finance certain atsets are allocated to the ownership and use of the public enterprises. These will be carried in an opening balance sheet at a valuation. That valuation may be based entire will also have liabilities. It is a policy decision whether all of some of these are carried into the opening balance sheet of the entity. Thus, the level of met asset to be inherited by a parastatals is basically the subject of a policy decision. Government may decide to be kind to the new entity, to bring in assets at an up to date valuation and not to clear existing liabilities. Obviously, such decision has important implication for the future running of the organization and for the type of financial objectives which may be set for it. Another initial decision relates to the finance of the net assets. They could be financed by equity capital, by loan capital or by a combination of the two. Moreover, the start period of time before the need to redeem the loan stock does not allow for building up sufficient liquid assets out of which redemption of the loan capital can be made. The result is that expectation, of financial performance are disappointed, management is frustrated by the impossibility of fulfilling targets. Liquidity problems are expenenced and government has to sep in to bring about a financial reconstruction e.g. by written off loan stock, lengthening its redemption date, reducing the loan interest payable, making non-interest bearing grants to cover the losses etc.
From the aforementioned contributions one can deduce the impacts of the exist once of government corporations on the economic setting in Nigeria and other countries at large. It can also be deduced that while government corporation have contributed immensely to the economic setting in Nigeria and other commies at large. It can also be defaced that while Government Corporation has contributed immensely to the economic and social progress of other countries, the situation with Nigeria seems to be different. This project will therefore focus on examine the financing problems that contributes to the ugly performance of the corporation in question and some suggested solution, that could help to alleviate such problems. Among such problem is the politicalization of the funding of parastatals. A parastatals may be treated by one regime as necessarily dependent on government for funds whereas another regime may treat the same parastatals or corporation as self financing. Also the level of net assets to be inherited by parastatals is basically the subject of policy decision. The result being that the expectation of financial performances is disappointed and liquidity problems experienced. As a matter of fact, the government should therefore define the financial structure and methods of finance of each parastatals and tries to broaden their resources bases so as to fulfill their targets.
GOVERNMENT PARTICIPATION IN PUBLIC CORPORATIONS
Before the depression of the 1930’s it was believed that the market mechanism can efficiently allocate resources without the intervention of the state. It stated further that since supply would always bring forth demand, an economic depression of the sat witnessed in the 1930’s was impossible, the great depression however put paid to this believe. In its place, the keysian proposition that market demand could fall short of the level required to keep the economy at full employment came to dominate economic theory and policy. The relative prosperity and expansion of the immediate post would war ii decades proved the effectiveness of keynesion demand management and made credible direct state intervention in the economy. This development and the demands of national politics in the cold wars years provided reasons for the emergence of the welfare state and nationalizations of enterprises by government in countries that were normally capitalist.
In support of this view “other nations particularly those emerging from colonial rule have often seen government institutions as the appropriate route for development. In other words, the stat turns entrepreneur not for ideological reason but to promote growth.
In Nigeria, in the decades of the 60’s and 70’s, it was almost universally believed that parastatals and state-owned enterprises would facilitate the defied rapid growth and development of national economics. Their involvement was expected to generate resources and further investment, provide the leading edge of modernization in the third world and act as catalyst of rapid rural development, expanded industrialization as well as just growth of money and capital markets. At independence, Nigerians found themselves in a situation where aliens among them help economic power and dominance, disproportion are to their number and contrary to the very essence of independence. It was, therefore, in this context that the government decided to involve itself in many sectors of the economy some for purely strategic reasons and others to act, as it were, on behalf of the citizen, the majority of who could not provide our resources or raise equity capital.
Also in support, at independence, the indigenous private sector was made up mainly of small farmers and traders, artisans and a few small manufactures. While foreignness dominated large scale trading, transportation, compunction, manufactory, etc government intervention at that time was to widen the scope of indigenous participation in the productive sectors of the economy especially into those areas that were beyond the reach of the indigenous private sector with the improvement in the nations oil fortunes and hence its revenue potentials, public sector participation in economic activities became quite pervasive.
Accordingly, there existed cogent reasons for government’s involvement in private sector activities in the first place. The relative background backwardness of the economy at time of independence and the urgency and expected for rapid growth and early transformation of the economic structure and improvement in society’s welfare means that the only institution of means and with the potentials of mobilizing savings and commending resource at that time, was the government. Thus its had to fill in the vaccum of acting as the prime instigator of growth. In a similar vein, when government was to invest in parastatals there was no ideological choice being made. It happened that most of the areas were benefit of any investment. You looked at the country trendy five years ago. Who was that Nigerian who had enough money and expertise to start a shipping line, a railway line, an airline, it was government alone that had the resources to start these organizations. So it was necessity, it was pragmatism that led government into these areas.
Similarly, in the oil boom days of the late 70’s to early 80’s, nothing became to small for the government to invest in or too big to go into alone. The nation always that period was one of an entrepreneurial state that had to intervene in all facts of economic activity, partly because private Nigeria did not have the resources to engage in some of these activities, but more largely because the government came into so much funds it did not know what else to do with them.
It was believed that government involvement in business was inevitable because of the absence of indigenous private capital to finance industrial enterprises soon after independence, the size and social significance of that establishment and the lack of exceptive man power to run them would have otherwise concentrated the control and ownership of these economic activities in foreign hands. Also, public ownership in a country like ours is a way of affecting a more equitable distribution of income though our collective ownership of the assets and income stream generated by the enterprises so owned.
RATIONALE FOR PUBLIC ENTERPRISES
Factors responsible for the existence and spread of public enterprises in various countries were identified by Tony Killrick as ideological, political developmental, employment protection, consumer protection and the need to improve the distribution of income. According to him the spread of socialist ideology is chief responsible for the public enterprises in a countries since the end of the second world war. The major objective of socialist ideology is state (or public) ownership of the major means of production and distribution in a given society in order to avoid the exploitation of the proletariat (the worker) by the money bougeous (the capitalist). Whereas, in the capitalist countries of western Europe the spread of public enterprises is explained by the periodic inclusion into power of labour and social democratic parties through popular elections.
In most developing countries like Nigeria where ideology has not played a dominant role in the shaping of economic events, the reason for the spread of public enterprises can be found mainly in the realms of political, social and economic considerations. Also, in a number of developing countries like Nigeria, public enterprises have been bloated by politician and bureaucrats as a means of boasting their power and prestige. Politicians see the establishment of public enterprises as a source of political power since it gives them the ability to award contracts to friend and supporters, to divert state funds to themselves and their political parties, to appoint their friends and supporters to the boards of such enterprises and to bring the presence of government to their places of origin.
In addition, another set of factors that explained the spread of public enterprises in Nigeria are developmental in nature. At independence, Nigeria indented a weak infrastructural basis for sustained and independent development. The indigenous private sector was extremely weak, small an backward. It could not be relied upon. Thus, the federal and regional government had to establish a most public enterprises. According to Dabacar N’Daye of the African Development Bank. ‘African governments had to assume a greater role in the development of their economies….in order to consolidate their political independence…………, to maintain control over national resources and foreign enterprises which tended to be monopolists, and to rescue filling ones so as to preserve jobs and to ensure provision of essential services?
PROBLEMS OF PUBLIC ENTERPRISES
It has been argued that socialized industry could be self supporting and economically successful only if it were freed from political interference. Public enterprises are subject to a wide range of statutory and administrative controls, as well as to less formal modes of intervention. Government influence extends well beyond that necessary to ensure that enterprises fulfill their economic, financial and social objectives”. In support of this views, there has always been massive political interference in parastatals. You set up a parastals, and you set up a board to look after it, and usually the members of the board are appointed on a political basis. Therefore they mount pressures on management to do things that management would not ordinarily wish to do. Things that management would not are not commercial that are not profit generating in other word, this irrational decisions by management are prompted often by politically oriented board members.
Also the management has never been challenged to operate in a commercial sense, knowing that if there is a crisis the government will not allow parastatals to go down the drain. So there is no challenge, no incentive on the part of management to perform and make profit. A time, parastatals are asked to perform by government, services that are not profitable or they perform services for which they should be paid but they are not paid. In addition, in choosing to locate an activity in the public sector. Market failure has given way to burealecratic failure.
Similarly, with government backing, public enterprises cannot go bankrupt and they do not face the risk of take-over; they are not, therefore, force to observe the financial discipline imposed on the private sector. They either do not have to borrow or the private capital market, or if they do, government guarantees or the assumption of government lacking results in their being favourably treated relative to private enterprises. Public enterprises fail to achieve allocate efficiency because they face little incentive to respond to consumer demands the quality, quantity, and other characteristic of goods and services provided by public enterprise are not those most valued by consumers.
This enumeration of the causes of financial mis-management in the country was made known, he said preparatory studies which should assist government functionaries to appreciate that scope and complexity of the business are often inadequate. There is also little preparation for physically setting up the management systems and structural organisation. Some how in the area of getting up adequate and efficient organization, our government have been unduly interlay. It is usually at this point that quibble about costs, not minding the total amount invested in the entire project requiring rotation. However apparent inability of government to decide from inception how an enterprises is to be financed could be a problem what funds must be generated both internally and externally by the company and what will be provided by government and on what terms should be closely identified from the beginning.
The problems of state ownership were not new. Adam Smith himself advocated the sale of crown lands in the Walh of nations, commenting, when the crown lands had become private property, they could, in a course of a few years, become well improved and well-cultivated.
A public enterprise is usually set up under an act of parliament or decre which spells out its activities and the scope of those activities. Often the public enterprises activities under the act or decree are so narrow that there is no room to look beyond the scope out lined. Government appoints the board of directors and the chief executive not directly on the grounds of professionalism or known track records but often on the premise for satisfying political goals. Appointments of top management cadre and staff are not as competitive as they should be so making it possible for inefficiency to creep into the restatement system, resulting in the inefficiencies which permeate along the organizational pyramid and the inability and reluctance of the work force to adapt to new management techniques.
Further more, the system of developing yearly goals and major objectives is relegated to the background and crisis management rather than corporate planning is given a pride of place. Also bureaucratic controls are exercised over the public enterprises by the parent ministry which lacks market place knowledge necessary for the successful management of the production process.
Consequently, falmbouryant wastage rather than profit making become the force driving many public enterprises supporting parastatals, for from living up to the original ideals of efficiency and commitment to the public goods, they were a heavy burden on the rest of the economy. Their losses and borrowing amounted to nearly (#3B) three Billion Naira a year their losses on investment productivity, and industrial relations was poor. And their service to the public was the both of endless forces”. Confirming, Dr Emest Wilson assets that public enterprises in less developed countries consumer for more resources than they have generated. They do not contribute to, they take away from national economic samples; as a rule they do not create growth, they help reduce it. Also, over staffing large scale and rampant corruption, inflation of contracts over-involving and outright embezzlement of public funds have almost become the rule rather than exception in government is responsible. Next to the issue of management in public enterprises in viability, since reasons not entirely economic, therefore there is the possibility that some of those enterprise may never be viable commercial ventures.
In the same vein, “the relative inefficiency and problems of public enterprise at both the federal government and state government levels were aggravated by the dividing resumes at the disposal of the authorities”. Accordingly, the problem today emerged when we lacked the certain grivets sector activities when the time was ripe to do so. In stead, the judge financial resources that came at the disposal of the government following the oil boom, made it more difficult to withdraw and of Infact easier to expand government activities in the private sector.
Similarly, therefore, the inefficiency in public enterprises can be attributed to the following:-
– ineffective systems of accountability
– employment and retention of unproductive labour force and overstaffing.
– Excessive costs of projects, which appear to incorporate financially hypertensive element.
– Lack of profit orientation since the government is always ready to provide extra funds to keep the organization going;
– Over protection by government for example in enjoyment of monopoly power;
– Lack of competitive no numeration or adequate incentives to innovate new technology, modernize operation or introduce cost-saving measure.
ISSUE OF FINANCING GOVERNMENT CORPORATION
Public corporation are business enterprises set up by an act of parliament, a decease or other legal instrument. Corporation are usually established to provide essential services which either the private sector is not likely to provide or the government does not wish to leave in the hands of the private sector. Another important element in the decision to create a corporation is the need to give the institution a greater degree of freedom of action then is applicable to traditional government, ministries or departments; this freedom of action is a reflection of the commercial nature of the operations of the corporation. Example of this public corporation in Nigeria are the National Electric power
Authority, the Nigerian coal corporation, the Nigerian mining corporation, the National insurance petroleum corporation, the Nigerian Airports Authority, the federal Radio corporation of Nigeria and the Nigerian Television Authority. Though not established by stature, the Nigeria Airways and Nigeria National shipping line, wholly owned government companies are generally referred to as public corporations.
Public corporation may be financed by different ways depending on their nature, objectives and the environment in which they operate. Some are wholly dependent on the government for financing e.g water corporation who obtain loan from commercial banks when government saves as their guarantor. They also a kind of grants from the government while a kind of grants from the government while the make up the remaining by themselves though the sales of water..
Nipost and others are self-financing, government does not act as their guarant and they only succeed in getting overdraft from banks while the make up they remaining from the sale of their output, but most corporations operate between the two extremes. The fact of the government is to ensure that the method of finance is appropriate to the characteristics of the public corporation consistent with the objective set by the government for the parastatals and in accordance with the economic needs of the country as interpreted by those comity holding political power. A parastatals treated by those comity holding a political regime as necessary dependent on the government for funds may be treated by another regime as self-financing.
The method of financing public corporation primate with the entity itself. A parastatal is either newly formed from the scratch or as a result of nationalization of previously existing entities. The government on this case has to decide on the financial structure and method of financing. Examining the initial financial structure are method of nationalization enterprises in Accounting terms.
Another further stressed that previously existing entity will also have abilities. It is a policy decision whether all or some of those (debt) should be carried into the opening balance sheet of the new entity. Thus the level of net asset to be intended by a public corporations is basically the subject of a policy decision. The government may decide to be kind to the public corporation formed, by bringing in asset at a conservative valuation or to be less kind to bring in assets at an up to date valuation and refuse to clear existing liabilities.
In the book “financial management of Nigeria public sector” koleade Dean, further emigrated the various ways government may finance public corporation:
a. By taking up loan capital
(i). With short redemption dates
(ii). With long redemption dates
b. By establishing the public corporation martially with interest beany
reserves ( a form of equity capital)
- By taking up equity capital in which dividend distribution are made at the dissertation of management.
- By granting loans and overdraft made available by third parties e.g banks and agencies.
- By outright grant
(i). To finance capital expenditure
(ii). To finance recurrent expenditure
- By making finance available on favourable term e.g by charging lower than normal interest rates on money lent.
- By finance deconstruction e.g by counting down assets and concealing existing obligations to government or by conversion of loan capital into public dividend capital or into interest bearing reserves.
Non-communication
(1) By granting funds to cover all permitted expenditure.
(2) By cash grant to meet any deficit tens the government requires detailed knowledge and agreement on how a deficit is to be calculated.
(3) By cash grants subjected to a ceiling based on budgeted cost and services. This can provide a motivation on management to maximize other sources of income and to minimize costs provided the grant is set at the right level.
(4) By capital grant to the entity, released, to installing facilities. This ensures that money is spent on the facilities specified, but may not ensure their completion in number originally envisaged because that depends on the adequate grant budgeting methods, costing, implementation etc.
(5) By direct problem of facilities via another branch of government e.g public works and ministry of buildings.
(6) By banking grant to be spent on particular items of recurrent or capital. This method leave maximum discretion to the management of the empty spending the money.
O.A level noted that public corporation are business organization which are directly under the control of the government. They are run as statutory corporations and their aim is to cater for the welfare of the people.
—-This article is not complete———–This article is not complete————
This article was extracted from a Project Research Work Topic
“THE PROBLEMS OF FINANCING GOVERNMENT CORPORATIONS
(CASE STUDY OF TRACAS)”
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The Problems of Financing Government Corporations
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