Why Does the Government Get Involved in Business Activities?

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By: Site Engineer, Staff

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We all knew that are various forms of business ownership. The major types of privately owned enterprises, namely sole proprietorship, partnerships and private companies with or without limited liability, also these may be owned by private interests and / or governments. There are many other more.

Then in discussing government participation in business, we are here concerned with government ownership and participation in commercial enterprises – their forms, rationale, disadvantages, present and future trends.

We define commercial enterprises as those that produce or offer for sale to the public any service or commodity that has a direct market price. Quite clearly, therefore, government ownership of non-commercial organizations such as government ministries, departments, and educational institutions is excluded from this discussion.

Forms of Government Participation

It must be noted that any attempt to categorize state-owned enterprises into iron-cast classes, ignores the dissimilarities that might exist among those in the same class. It also tends to over-emphasize the differences among those in the different classes. Nevertheless, the following classification is useful for the understanding of the modes of government participation.

Three main forms of government participation in commercial and industrial enterprises can be distinguished.

Firstly, there are those enterprises in which the government is a shareholder along with some other private interests. The government may or may not be a majority shareholder. In either case, the government by virtue of its part ownership appoints some members of the board of directors. Examples of such enterprises in Nigerian are commercial banks such as Union Bank, National Bank, First Bank and United Band for Africa. Others are oil exploration and marketing companies such as Shell Company, National Oil and Chemical Marketing Company, and Mobil.

These are enterprises registered under the 1968 Companies Decree as Public Limited Liability Companies.

Secondly, there are commercial enterprises that are wholly-owned by the government. These are usually established by Decrees or Acts of Parliament, or established and operated in strict compliance with the Companies Act, and within the provisions in their Articles and Memorandum of Association. They differ from the first group only in the sense that they are wholly government-owned. They are not Statutory Monopolies. They are expected to make a profit and pay taxes.

These, of course, can be distinguished from those that are usually referred to as Public or Statutory Corporations. Examples of companies in this category include the Nigerian Insurance Corporation of Nigeria, (NICON), Bendel Cement Company Ltd., Nigerian National Supply Company, Sokoto Cement Company, and Nigeria National Shipping Line Ltd.

Thirdly, these are the category of government-owned commercial enterprises is made up of what is more popularly known as Statutory Corporations. Examples are the Nigerian Railway Corporation, the Nigerian Electric Power Plc., and Nigeria Airways.

They are non-profit oriented enterprises, whose main responsibility is the provision of essential infrastructural facilities considered strategic to the smooth-running of the economy. Statutory corporations are not established under the Companies Act, but by special Acts of Parliament (the National Assembly).

Structure of Control

The structure of control refers to the pattern of accountability within an organization. It shows who has the authority to oversee which particular activities.

For companies registered under the Companies Act of 1968, in which the government is one of, or the only shareholder(s), the structure of control is similar to those of public limited liability companies.

Management is answerable to a board of directors, which is in turn responsible to its shareholders. Members of the Board of Directors are appointed or removed by shareholders at their Annual General Meetings. However, the executive arm of the government, acting in its capacity as a shareholder, appoints its own representative(s) on the boards of those companies, in which the government has some or all of the equity interest. The executive arm of government also has the prerogative to remove or replace its appointee(s) on the board.

In the case of public corporations established by Decrees or Acts of the National Assembly, management is responsible to the board of directors or board of management, as it is sometimes called.

The board whose members hold their appointments at the discretion of the executive arm of government is answerable to the minister or commissioner in charge of the ministry that supervises the corporation.

Arguments for Government Participation in the Business

There is no general agreement as to need for and extent of government participation in business. Extreme advocates of capitalism believe that government participation in the ownership and control of business is undesirable. To them, it is against the capitalist philosophy of free market enterprise and competition, and should be avoided at all cost.

The United States of America represents this tradition. The other economic system is represented by socialism and its ultimate form, communism, both of which advocate government ownership and control of the factors of production and distribution. This socialist tradition considers capitalism as unfair, exploitative and primitive. A middle-of-the-road alternative is the so-called mixed system, where government-cum-private ownership of the means of production is preferred to the two extremes earlier discussed.

Nigeria is often described as a mixed economy because both government and private ownership of the means of production and distribution exist.

Within the context of the so-called mixed system which Nigeria practices, we shall discuss the arguments for and against government participation in business.

The usual reasons put forward by advocates of state participation in the control and ownership of business enterprises are discussed below.

The government might take over an industry or participate in some other way if it believes that the capital requirements are so huge that it might be outside the financial capability of private interests, or that it might not be attractive to private investors.

Similar to the above point is the fact that some industries are regarded as key or strategic, either from the point of view of their indispensability or their strategic importance to national security. Consequently, government is often reluctant to let private interests dominate such industries. The production of atomic energy and armaments are obvious examples.

In Nigeria, the petroleum industry is another good example, since this sector is so strategic that what happens to it literarily determines what happens to the rest of the national economy. Government participation is partly intended to bring with its reliability and regularity of supply of the outputs of such firms.

Another reason for government participation is the quest for additional revenue, to enable it to pursue its obligation to provide goods and services to its citizens. This objective is probably difficult to achieve in some countries, especially Nigeria where some government enterprises are being perpetually subsidized. Nevertheless, the need for more funds remains a reason for government participation. Commercial banks and oil companies in which the Nigerian government has substantial interests make huge profits annually, but the same cannot be said of many public corporations that are wholly government-owned.

The provision of goods and services by government-owned enterprises is often considered to be the easiest way to ensure that consumers are not exploited through unsafe and shoddy products and high prices.

It is no wonder, therefore, that government participation is often rationalized on such grounds. This is perhaps one of the principal reasons for the establishment of the Nigerian National Supply Company (which is now extinct) and many government-owned cement companies. The same is partly true of oil marketing companies, whose products are heavily subsidized.

State-owned companies are sometimes seen as a means for pursuing the usual government policy of providing employment for its citizens. It is not, therefore, unlikely that state-owned enterprises may be established in pursuit of this goal. Although some corporations may be making losses consistently, the government may be reluctant to fold them up, because of the unemployment problems that might result.

The establishment and siting of state-owned industries may be influenced by the government’s wish to promote even development among the various sectors of the economy, or among the various geographical areas of the country. The policy of integrated urban and rural development currently pursued by some state governments in Nigeria represents an example of this.

In some cases, competition might result in unhealthy duplication and wasteful use of scarce resources. In such cases, the government might set up a corporation with the sole right to operate in the industry.

Finally, the government sometimes participates in business in order to provide a model for others to follow, on how to run a business efficiently.

Argument Against Government Participation in the Business

Those who do not favor government participation rest their opposition on two main arguments. First, they contend that the bureaucratic structure of government machinery is unsuitable for the management of any business organization.

Secondly, they argue that the absence of any specific individuals who can rightly call state-owned business their own results in a lack of commitment to the organizational goals. The notion that everybody’s business is nobody’s leads to wastages in the use of resources, a loose system of control, and poor motivation on the part of workers.

In Africa, the competing notion that government’s business is everybody’s has tended to lead to corruption, a situation in which every individual that deals with the organization is preoccupied with personal returns at the expense of the organization. The result, it is claimed, is fraud, inflated contracts, nepotism, and tribalism.

Unfortunately, the Nigerian experience tends to lend credence to these theories. However, this does not appear to reflect the experience in some other parts of the world. For example, state-ownership thrives in socialist economies such as the former USSR.

The experience in socialist economies suggests that there is nothing intrinsically wrong with government ownership; what is perhaps lacking in Africa is a dedicated leadership that can provide a more realistic, responsive and flexible system of control, to enable public enterprises to respond successfully to environmental pressures. Some people, writing in this vein, have partly attributed the poor attitude to work in the public sector to lack of result-orientation, and a non-instrumental relationship between performance and reward.

Lack of result-orientation can thrive for a variety of reasons. Managers of public enterprises often complain of poor government financing and unnecessary interference from politicians. Sometimes, goals are not clearly specified, and when multiple goals are established, priorities are not identified.

Consequently, many government-owned companies have to cope with economic goals such as return on investment, earnings per share and growth, as well as social objectives, such as providing employment opportunities for as many people as possible. Quite often, political goals such as generating revenue for the political party in power further complicate the situation.

More often than not, government-owned enterprises become a dumping ground for politicians defeated in elections, irrespective of their qualifications, experience, and other possibly conflicting interests.

Given a climate of this nature, the level of motivation of many employees in these enterprises tends to below. The situation is further worsened by the perceived poor relationship between performance (or effort) and reward.

A situation created where many workers believe that their advancement opportunities lie, not in working hard, but in whether or not they have godfathers.

In light of the above, efforts to enhance the effectiveness and efficiency of state-owned enterprises should be directed at improving on:

  • The instrumentality of performance, so that rewards such as promotion and pay are determined mainly by the individual’s contributions to the goals of the organization.
  • The structure of control, so as to give managers a free hand, and to reduce, or better still, eliminate unnecessary government interference; and
  • The selection of prospective employees to ensure that only qualified, competent and honest people are offered employment.

Future Trends in Government Participation in Nigerian 

Since attaining independence in 1960, the Federal Government has pursued a deliberate poly of the so-called mixed economy. This simply means that government participates in the business, alongside other private interests. Consequently, today, Nigeria has a large public sector, and the government is involved in direct production in many industries.

In the case of agro-allied industries, government policy during the Third Plan (1975-1980) tended to emphasize direct production in large-scale mechanized farms, especially those established by public sector enterprises, which, unfortunately, contributed little to output.

In the Fourth National Development Plan, (1981-1985), government policy was to emphasize promotional activities more than 90% of the country’s domestic food supply. The total Federal Government allocation to crop production in the Fourth Plan Stood at 3,000 million naira.

In the mining sector, a total sum of 6,575 million naira was budgeted for investment in the Fourth Plan.

In the area of manufacturing, the three levels of government – federal, state and local governments- planned a grand total capital expenditure of 8.2 billion naira, made up as follows: Federal Government       6,393,300 million naira (77.8%)

State Government 1,733,611 million naira (21.1%)

Local Governments 94,435 million naira (1.1%)

In absolute terms, it shows that government participation is greatest in steel production, refinery and petrol-chemicals, the financial sector and agro-allied industries.

Agriculture and Rural Development 

Various state governments during the Third National Development Plan (1975 – 1980) established food production companies, with a view to modernizing agricultural production. In addition to emphasizing promotional activities aimed at increasing the output of small-scale farms, the Federal Government in the Fourth National Development Plan (1981 – 1985) decided that its participation in direct production would come mainly by way of equity holding, in purely commercial joint ventures with the private sector.

It also affirmed that the Commodity Boards/Grains Production Company would be prepared to go into partnership with private indigenous and/or foreign investors in establishing large-scale farms.

Mining and Quarrying

Government’s policy was to ensure active state participation in mining operation. In view of the importance of this sector in the nation’s economy, therefore, Government planned to further increase direct participation in the production, processing, and distribution of minerals resources.

In this regard, government policy was aimed at strengthening the existing government agencies, while allowing private investment.

Manufacturing and Crafts

Government strategy was to continue to actively participate in this sector, alongside private entrepreneurs.

The following underlines government’s plan of action in this direction:

Public sector investment will, as in the past, continue to complement that of the private sector, and as much as possible, the former will be in cooperation with private partners. This is to ensure that such government ventures operate as much as possible along commercial lines, rather than as social services. Every industrial venture sponsored by the government will be expected to pay its way, even if for social seasons: it is considered undesirable to insist on profit maximization. Apart from the defense industries and security printing, no specific area will be reserved exclusively for the government. The private sector will be free to invest its resources in any enterprise, provided they conform with guidelines to be issued from time to time by the government.

Commerce and Finance

For this sector, which includes distributive trade, exports and imports, banking and insurance, tourism, hotel development and provision of markets and shopping centers, the government expected the bulk of the investment to come from the private sector. However, the government planned to provide the necessary policy guidelines and those infrastructural facilities which the private sector is ill-equipped to provide.

Structural Adjustment Programme

From the outline of the Fourth National Development Plan, 1981 – 1985, it is clear that the government was committed to its avowed policy of participation in commercial and industrial activities in the country. However, events of the early eighties resulted in a major shift in government policy.

The sharp drop in the price of crude oil, which is the main source of foreign exchange, created a serious balance of payments disequilibrium, large government budget deficits and inflation. Measures that were taken to solve these economic problems under the Economic Emergency Decree of 1985 were largely ineffective.

Meanwhile, the country had accumulated substantial short and medium-term debts to foreign governments and banks which she was unable to meet on schedule. Consequently, credit-lines were threatened and essential inputs of raw materials and spare parts were in turn impeded.

In order to revamp the economy and restore credit-worthiness internationally, Nigeria adopted the Structural Adjustment Programme, whose main elements included deregulation, reduction of administration controls, greater reliance on market forces, as well as rationalization and privatization/commercialization of public enterprises. By the end of 1988, the government had set in motion the process of privatizing or commercializing public enterprises, except a few strategic industries.

 

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