Public Enterprises

Back to: ECONOMICS SS1

Welcome to class! 

In today’s class, we will be talking about public enterprises. Enjoy the class!

Public Enterprises

At the end of the lesson, you should be able to;

• Describe Cooperative society and Public Enterprise
• Analyse the features of cooperative Society
• Justify the reasons for establishing Public enterprises and its contributions to the economy

A Public Enterprise may be defined as a business organization which is owned, established and completely controlled by the government. It is also known as a public corporation or statutory corporation. It is established by an ACT of Parliament or an enabling Decree. E.g. former Nigerian Airways, Nigeria Ports Authority and NERC are good examples

Characteristics and features

1. It is owned by the government and financed by taxpayers money
2. It is established to render essential services and not for profit-making
3. A huge amount of capital is involved in the formation and it is provided by the government
4. It is established by Acts of parliament or an enabling decree
5. Perpetual of the business is highly guaranteed
6. The reward is the improvement in the wellbeing and standard of living of the people

Evaluation

1. Define public enterprises.
2. Highlight the features of a government-owned firm.

Reasons for government ownership of public corporations

1. Capital involvement
2. To prevent exploitation
3. To ensure a constant supply
4. Prevention of foreign control of the economy
5. Creation of employment opportunities
6. To facilitate economic development
7. To discourage monopoly.

Problems encountered by public corporations

1. Lack of adequate personnel
2. The lackluster attitude of workers
3. The problem of corruption and mismanagement
4. The problem of over-investment of scarce capital in certain industries
5. Problem of co-ordination
6. Problems associated with less of consumers sovereignty

Evaluation

1. List and explain the problems of a public corporation.
2. Why does the government participate in business ownership?

Advantages of a public corporation

1. The huge amount of capital involved may not be affordable by the individual, hence government involvement
2. To prevent exploitation and duplication
3. To avoid a private monopoly
4. To provide employment opportunities
5. For security reason s
6. To raise the standard of living
7. For rapid economic development
8. It enjoys the advantages of large scale production

Disadvantages of a public corporation

1. It leads to frequent interfere in the affairs of  the business
2. Enjoyment of Monopoly as a result of government ownership
3. Frequent change of government brings about inefficiency
4. There is a lack of competition
5. There is the problem of bureaucracy
6. Dishonesty and embezzlement of funds are common.

Evaluation

1. List and explain five advantages of a public corporation.
2. List and explain five disadvantages of a public corporation.

Sources of finance for business organisation

A firm whether small or large has two broad categories of financial sources or simply put, how they can raise capital. These can be internal or external sources

1. Internal sources: these are ways by which capital is provided within a business enterprise
2. External sources: these are ways by which firms raise capital outside the organization

Small firms

Internal sources of finance for small firms

1. Personal Savings: this is a common method used by sole traders and partnerships form of business where their personal saved money is converted to capital to start the business
2. Ploughed Back Profit: This is a process of re-investing part of profit made by a business concern. It is also termed self-financing

External sources of finance for small firms

1. Borrowings from friends, relatives or other persons to begin or expand the business
2. Borrowing from banks, provided they have the necessary collateral security
3. Loans from the government through financial institutions e.g. Nigerian Bank for Commerce and Industry. (NBCI) , the Industrial Development Bank (IDB) e.t.c.
4. Merging of small businesses to form larger units to increase the size of capital available for business operations
5. Purchase of goods on credit provided the business is creditworthy
6. Admission of new partners that bring in more capital
7. Payment of nominal fees and membership forms by the co-operative members

Evaluation

1. What are the importance of capital to business organization?
2. What are the external sources of finance for small firms?

Large firms (e.g joint-stock companies)

Internal sources of capital for large firms

These include:

1. Contributions by the founding members: which may be later converted to founder’s shares.
2. Retained profits: this is a form of expansion to firms by ploughing back some of the accumulated profits
3. Use of Depreciation funds: this is the money set aside for the replacement of worn-out machines and other durables capital. This money could be used before the time is due for the replacement of the machines or equipment

External sources for large firms

1. Selling of shares: this is a major way by which large firms raise capital. These shares could be ordinary shares or preference shares
2. Buying on credit provided they are credit-worthy
3. Taking loans from commercial banks in the form of overdrafts or short term loans
4. Investment Trusts: these are companies that are specialized in giving loans to firms for industrial development e.g. insurance companies, building societies etc.
5. Finance corporations: these are business units set up by the government to give loans to business for development projects
6. Debentures: A debenture is an instrument or a loan certificate for raising a long – term loan from the public by a limited company. A debenture is a debt and a debenture holder is not a co-owner of the business but a creditor. He receives a fixed rate of interest on his capital whether the company is making profit or not. His money is repaid at maturity, at an agreed date. If the business fails, he receives back his capital before the shareholders. So, by taking debentures a firm can raise capital externally.
7. Equipment leasing and hire purchases in which repayment is on instalment
8. Grants from the government for public enterprises
9. Grants from foreign countries and international financial institutions, e.g. IMF, Paris Club

1. Highlight the sources of capital of large firms.
2. List five external sources of capital of large firms

General evaluation

1. Why is the scale of preference important?
2. Explain the concept of opportunity cost.
3. What are capital goods?
4. How does a government solve the problem of scarcity?
5. Define public corporation.
6. List and explain four disadvantages of public

 

In our next class, we will be talking about Labour Market.  We hope you enjoyed the class.

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