MODULE 1 FUNDAMENTALS OF PUBLIC ENTERPRISES

Definition of Public Enterprises

According to Obikeze and Anthony (2004), public enterprise refers to an organisation

that is set up as a corporate body and as part of the governmental apparatus for
entrepreneurial or entrepreneurial-like objectives. They emerge as a result of government
acting in the capacity of an entrepreneur. Public enterprises otherwise known as public
corporations are public institutions or government agencies, which are created, solely
owned and managed by the state to run certain activities of a specialized nature,
requiring business-like administration. They are established by acts made by the
legislature, which define their powers, functions, structure and their relationship with
other government institutions.
(Eneanya, 2020)

A public enterprise is a publicly-owned enterprise that has been chartered under federal,
state or local government law for a particular business or financial purpose (Dimock and
Dimock, 1970). The United Nations (1971), defined a public enterprise as an
incorporated or large unincorporated enterprise in which public authorities hold a
majority of the shares and/or can exercise control over management decisions.

Public enterprise also refers to an economic organisation belonging wholly or partly to

the government and which has a legal status, financial autonomy, and is under state
control. It includes those "mixed enterprises" which are controlled by the state as well as
those enterprises which are, on occasion, established for non-business purposes to escape
the shackles of existing bureaucracy.

Public enterprises provide many services which include utilities such as

telecommunications, electricity, gas supplies, water and sewage; transport such as
airline, rail, shipping services and urban public transport; financial services notably
banks and insurance, motor vehicles; companies such as tobacco and alcohol companies.

Meaning of Public Enterprises

Going by the definitions presented above, public enterprises essentially have the features
of several individuals who act as one. As such, the enterprise is viewed as an artificial
person authorised by law to carry on particular activities and functions. It is described as
a corporate body created by the legislature with defined powers and functions and
independently having a clear-cut jurisdiction over a specified area or over a particular
type of commercial activity (Ekhator, 2002). As a corporate body, a public enterprise has
a legal personality separate from that of the government that establishes it. It can own
property, enter into contracts, and sue and be sued.
Public enterprise is part of government apparatus and three implications are hereby
highlighted.

 Firstly, a public enterprise, by virtue of its intricate relationship with government,

is an instrument of public policy and its primary mission is in connection with
governmental objectives and programmes. It is therefore naturally under
governmental control.
 Secondly, a public enterprise, by its nature, mostly manages public resources,
especially public money and this means that attention must be paid to
mechanisms for enforcing accountability.
 Thirdly, the combination of financial and economic objectives with social and
political aims invariably makes it difficult to devise appropriate performance
measurement instruments (Obikeze and Anthony, 2004).

Objectives of Public Enterprises

The major objectives of public enterprises could be summarised as follows:

 To promote rapid economic growth and industrialization of the country and create
the necessary infrastructure for economic development.
 To earn a return on investment and thus generate resources for development.
 To promote redistribution of income and wealth.
 To create employment opportunities.
 To promote balanced regional development.
 To assist the development of small scale and ancillary industries.
 To promote import substitution, and to save and earn foreign exchange for the
economy.
 To encourage the production of certain goods and services in order to discourage
their importation; thus, substituting for imports.

Origin of Public Enterprises

The origin of public enterprises could be traced to the early 20th century when
government intervened in economic management through departmental organisations
which did not involve creating autonomous public bodies. Public enterprises made a very
strong appearance after World War I for a variety of reasons, including managing the
consequences of the war, especially the economic crisis of the 1930s. However, the
public enterprise sector developed rapidly because of the spread of Keynesian
Interventionist. Between the two World Wars, political and ideological considerations
prompted the establishment of parastatals in the former colonial metropolis.

The movement toward the establishment of public enterprises received a new impetus
after World War II for reasons related to both ideological considerations and economic
efficiency. To attain some measure of economic independence and fasttrack national
development, the public enterprise sector then developed at a tremendous pace in the
immediate years after independence through the 1980s and a huge public enterprise
sector was firmly established in most countries.

The weakness of the private sector, the lack of infrastructure, the low level of social and
human development, and the unfavorable social, economic and financial environment
are some of the reasons given to explain the proliferation of public enterprises in all
areas of economic and social development. Other reasons include the urge to generate
revenue to limit foreign economic domination and to provide a substitute for a private
initiative where it was not forthcoming.

Characteristics of Public Enterprises

Public enterprises share certain characteristics in common, they are as follows:

 Creation of an Act of the Legislature: A public enterprise comes into existence as

a result of an act passed by the legislature or a decree under military rule. Public
enterprise also defines its aims and objectives, powers and duties, immunities, the
form of management and relationship with established departments and
ministries.

 A legal person: It is a legal person, capable of suing and being sued, entering into
contracts, acquiring and owing property in its own name and can also dispose of
property than ordinary government departments
 .
 Government ownership and management: Public enterprises are owned and
managed by the central or state government, or by the local authority. The
government may either wholly own the public enterprises or the ownership may
partly be with the government and partly with the private industrialists and the
public. In any case, the control, management and ownership remain primarily
with the government.

 Considerable financial freedom: Except for appropriations to produce capital or to

cover losses, a public enterprise is usually independently financed. It obtains its
funds from the treasury or the public and from revenues derived from the sale of
goods and services. It is authorised to use and reuse its revenues.

 Public welfare: Public enterprises are not guided by profit motive. Their major
focus is on providing services or commodities at reasonable prices which can be
afforded by the generality of the citizenry.
  Public utility services: Public sector enterprises concentrate on providing public
utility services like transport, electricity, telecommunication, health, etc.

 Public accountability: Public enterprises are governed by public policies

formulated by the government and are accountable to the legislature.

 Excessive formalities: The government rules and regulations force the public
enterprises to observe excessive formalities in their operations. This makes the
task of management very sensitive and cumbersome.

Creation of Public Enterprises

The creation of a public enterprise raises some important legal issues. Whether a
government is setting up a parastatal from scratch or is taking over ventures belonging to
private interest, the choice of the legal status of the enterprises depends greatly on the
prevailing constitutional and legal provisions on government intervention in business
and on private property protection.

 Creating a Public Enterprise from Scratch - In a democratic setting, the primary

responsibility lies with the legislature. This is to restrict individual rights and
public liberties, as it affects free competition and whatever reduces the freedom to
embark on economic activity in a society that recognizes private initiative must be
backed by law.

 Taking over Private Business - The process of taking over private enterprises or
transferring the ownership of private enterprises to the government is called
nationalisation. Enabling law is needed to affect such a transfer, in some cases the
enterprise being taken over is specifically mentioned in the law, but in other
cases, some general criteria are indicated to delineate the activity or type of
entities concerned.

 Dissolving a Public Enterprise - Public enterprise can be dissolved by liquidation,

a transfer to private ownership (privatisation), or a merger with another public
enterprise.

Reasons for the establishment of Public Enterprises

There are several reasons for the establishment of public enterprises. They are outlined
below:
 The desire to use the public enterprise as an instrument of effective plan
implementation in a context where it appears futile to devise a development plan
for the private sector.
 The need to secure economic independence.
  The urgent desire to assure government control over ‘strategic’ sectors of the
economy (e.g. central banking, broadcasting, iron and steel, roads, shipping, etc.).
 The need to separate some activities from the civil service and allow more
autonomy in their running.
 The perceived need to provide employment for the citizens in a context where the
private sector offers very limited employment opportunities.
 The need to ensure state control of key profitable enterprises with a view to
generating revenues that will add to the available national capital for financing
development programmes and projects.
 The desire of some socialist-orientated regimes to use state control of key
profitable enterprises to pursue the objectives of preventing the concentration of
wealth or of the means of production and exchange in the hands of a few
individuals or of a group (i.e. promoting equitable distribution of wealth).
(Obikeze & Anthony, 2004).

Classification of Public Enterprises

There is no single, best way of categorizing public enterprises, and no classification is

fully satisfactory in all circumstances. In general, several categories of public enterprises
can be identified on the basis of their origins, ownership, activities or domains of
intervention, and funding mechanisms. More prominently, public enterprises have been
classified on the basis of their economic activities, legal status and responsibilities. The
latter would form the basis for our classification in this unit.

 Classification of Public Enterprises by Economic Activities

o According to Burk head (1956), public enterprises might be classified
according to the economic activities they conduct. Accordingly, there are two
types of public enterprise.
 Enterprises engaging in financial transactions. E.g. Banks and
insurance
 Enterprises engaging in the production of goods and rendering of
services. E.g. Transport, water, electricity, education, health, etc.
o As you can see above, this classification of public enterprises is basically
centered on the nature or type of economic activities that a public enterprise
has been mandated by the law to engage in.

 Classification of Public Enterprises by Legal Consideration

o According to Laleye cited Adamolekun (2005), a public enterprise takes one
of three legal forms: a public or statutory corporation, a state-owned company,
or a mixed-economy enterprise in which the state is the major shareholder (51
per cent or more). Hence public enterprises can be classified as shown below:
 Public/Statutory Corporation - These are enterprises, which arise when
the government assumes responsibility for the management of an
 economic or social pursuit through a special entity that has its own
legal personality and still keeps some of the special prerogatives or
privileges associated with a governmental organisation. The blend of
these features is aimed at enabling the organisation to function
effectively as an autonomous body while it remains an instrument of
government policy.
 State-Owned Companies - These are companies created by the
government under the provisions of ordinary company law, though they
belong entirely to the government. They are registered in the registry of
companies, with the government as the sole proprietor.
 Mixed-Economy Enterprises - These are enterprises where the
government is the majority shareholder (51 per cent or more) in a
partnership with private entrepreneurs. In such companies, the
government usually dominates the board since it is the major
shareholder.

 Classification of Public Enterprises by Responsibilities or Roles

o Oshisami and Dean (1984) categorised public enterprises into four types based
on the roles and responsibilities they are mandated to perform:
 Public utilities
 Financial institution
 Commercial and industrial companies
 Regulatory or service board