The effect of funding on the performance of government corporation in Nigeria
CHAPTER ONE/INTRODUCTION
1.1 Background to the Study
The solidity of Nigeria’s government corporation became significant immediately after independence on 1st October, 1960. On assumption of power, the nationalists articulated a clear role for Government Corporation as instruments for promoting national development. The indigenization policy of 1972 as enacted by the Nigerian Enterprises Promotion Decree of 1972, which took effect from 1st April 1974, with its subsequent amendment in 1976 provided a concrete basis for governments’ intensified efforts towards participation in the ownership and management of Government Corporation (Elijah, 2009). The government capital investments in public enterprise totaled 23 billion naira between 1975 and 1985. In addition to equity investments, government gave subsidies of 11.5 billion naira to various states for the maintenance of their enterprises (Ogundipe 1986). Government has a lot of roles to play in order to raise the standard of living of her citizens.
For instance, this developmental role of the state was provided for in the country’s 1979 constitution and also enshrined in the 1999 constitution. According to sections 16 of 1979 constitution and 24 of the 1999 constitution: The state shall:
- Harness the resources of the nation and promote national prosperity and an efficient, a dynamic and self reliance economy.
- Control the national economy in such manner as to secure the maximum welfare, freedom and happiness of every citizen on the basis of social justice and equality of status and opportunity.
- Without prejudice to its right to operate or participate in areas of economy other than the major sectors of the economy, manage and operate the major sectors of the economy.
- Without prejudice to the right of any person to participate in areas of the economy within the major sector of the economy, protect the right of every citizen to engage in any economic activities outside the major sectors of the economy. In the light of the foregoing therefore;
The state shall direct the policy toward ensuring:
- The promotion of a planned and balanced economic development;
- That the material resources of the nation are harnessed and distributed as best as possible to serve the common good;
- That the economic system is not operated in such a manner as to permit the concentration of wealth or the means of production and exchange in the hands of few individuals or groups; and
- Suitable and adequate shelter suitable and adequate food, reasonable national minimum living wages, old age persons, and unemployment, sick benefits and welfare of the disabled are provided for all citizens. In order to achieve the above listed economic objectives, governments, at all levels-central, state and local governments assumed the role of entrepreneurs by embarking on the establishment of public enterprises.
As we stated at the beginning part of this chapter, Government Corporation are some of the agencies which colonial administration bequeathed to the people of Nigeria. These are enterprises owned by the Federal, State or Local governments. They are established by specific laws, which contain provisions relating to finance, personnel, method of achieving their objectives and other matters necessary for the realization of their goals. Public enterprise is an institution operating services of an economic or social character on behalf of government but enjoying an independent legal status. It is largely autonomous in its management though responsive to the public through government and subject to some directives by governments; is equipped on the other hand with independent and separate funds and legal and commercial or non profit – oriented/ attributes of enterprises (Hanson 1960). There are many reasons that explain why African states have created and sustained public enterprises. Nellis (2009:2) reasons thus:
Institutions and pre-dispositions inherited from centralized interventionists colonial regimes; a tendency to associate liberal capitalism with colonialism and imperialism; the post war ascendancy of leftist statist political ideologies; the apparent absence or embryonic nature of the indigenous private sector enterprises; the conversion of failing private enterprises into Government Corporation to forestall increases in employment; the attractiveness of Government Corporation to politicians who use them as patronage mechanisms to distribute jobs to both the mighty and the minor and to provide goods and service. These are but some of the more important historical, economic; social and political factors which have led almost every African state to create large public enterprise sector.
The fundamental reason for the establishment of Government Corporation in all economies is the provision of services which are too costly for individuals to provide. Modern governments especially those in the transitional societies are expected to be committed to the enhancement of economic and industrial growth and development for the provision of social welfare services. They may directly establish and run industrial and commercial enterprises under the country’s company law, obtain direct shares in private, industrial and commercial enterprises, go into partnership with private businesses or institute agencies to do so on behalf of the public. Thus Government Corporation are being expanded to include the provision of essential services such as marketing, transport, housing, hospitability, games, financial services and garbage removal. Government Corporation in Nigeria also undertake development projects like market construction and reconstruction for the overall good of the public, however with the aim of profit making.
There are various forms of Government Corporation all over the world. In Nigeria for example, Adamolekun (1982: 43) distinguished the groups thus:
- Statutory corporations which involve public utility corporations, development finance corporations and the welfare and social service corporations;
- Mixed economy enterprises; and
- State owned companies.
Statutory corporations are created by special statutes. These statutes make provisions for their operational guidelines. They are expected to provide infrastructure facilities such as water, electricity and transport satisfactorily and at modest costs. They are also expected to ensure that goods of adequate quality and quantity are made available to the people. Mixed economy enterprises are those enterprises in which government co-operates with private entrepreneurs to establish a commercial venture. The state puts in a greater share in the enterprise. With the state putting in a greater share implies that she has an edge in the ownership, control and management of the enterprise. State owned enterprises or companies operate under the same company laws that regulate the activities of private sector enterprises. In Enugu state for example, Enugu State Marketing Company; Enugu State Transport Company, Ikenga Hotels, Nike Lake Resort Hotel, and Nigerian Construction and Furniture Company belong to this category. These enterprises are expected to provide services and at the same time maximize profits. This means that they are profit oriented.
This study is specifically concerned with state owned enterprises that were created to be generating wealth needed for the provision of public good, including employment opportunities. Unfortunately, public expenditures attached to the upkeep of state owned enterprises in most of the countries of the world and especially in Nigeria have been observed to be less productive since they have failed to yield a corresponding positive return both directly and indirectly (Uzochukwu, 2003). This fundamental problem of defective capital structures is due to the application of inappropriate investment management practices leading to unwise investment which generates losses, (Usman, 2002). Fekuru (2000), presented evidence of poor performance of state owned enterprises with 60 percent of posted net losses and 36 percent negative net worth which resulted to an astronomical rise of accumulated losses in Nigeria. The government is therefore, finding it difficult to sustain the requirements of its state owned enterprises, particularly since they performed below expectations in terms of their returns on investments and quality of service delivery.
As Government Corporation are confronted with the problem of application of inappropriate investment management practices; the dwindling of their financial returns become manifest. Government Corporation in Enugu State are established and funded by the government through budgetary allocation and subventions. They also generate fund from the sale of their goods and services and seek both long and short term loans from banks, especially from African Development Bank as well as from other miscellaneous sources. But the funds are not always enough to face the new challenges caused by expanded competition due to the breaking of the government’s monopoly in some businesses by the private sector organizations.
Hence, Government Corporation in Enugu State are faced with the problems of managing her limited finances in such a way that the objectives for which they were created could be realized with some degree of efficiency. For quite a long time now, a call has been made on how to improve the condition of Government Corporation for their sustainability and public satisfaction. Akpan (1982: 49) noted that:
Government Corporation should be run in a business like manner in the sense of conserving and utilizing available resource for the achievement of the best possible results; eliminating red tape; being fully and readily responsive to the needs of the public who constitute their ‘customers’ and employers; being expeditions in the dispatch of their functions, in short doing away with all the stigma usually associated with public service bureaucracy.
Up till today, Government Corporation are challenged by improper investments leading to their suppression and sale to private enterprises. This state of affairs in Government Corporation should not be allowed to persist. In the production of some of the consumer goods and services by public enterprises, it is necessary to determine whether the capital outlays are justified or not. This justification is determined by the rate of financial returns to investment (Adeyemo, 2010).
If Government Corporation in Enugu State are to perform their statutory obligations to a reasonable standard they must be financially viable and their overall management must be geared towards attaining efficiency in investment management. Improving the financial State of Government Corporation in Enugu State implies integrating right or modern investment management practices which among others involve investing, the available funds in various economically viable projects. In investing in projects, the use of appropriate capital structure and investment management technique to enhance efficient investment in viable profits has been advocated (Pandey, 1991). The adoption of modern investment management practices such as capital budgeting decision practices (invesmtnt appraisal techniques), control practices and motivation practices ensure that profitable projects are identified; project monitoring, and customer quality are identified before credit transactions are made; and that employees are encouraged so that they will be initiating investments that can promote the growth of Government Corporation in Enugu State, Nigeria. The adoption of appropriate control mechanisms also creates efficient systems of controls that ensure that the businesses run by the enterprises are carried out in orderly and efficient manner. This means adhering to management policy, safeguarding assets and securing as much as possible the accuracy of the enterprises’ funds.
1.2 Statement of the Problem
Government Corporation in Nigeria have failed in boosting wealth creation due to poor investment management practices which resulted to unwise investment. The Nigerian Government Corporation suffer from gross mismanagement and consequently resulted to inefficiency in the use of productive capital which in turn weakens the ability of government to carry out its functions efficiently (World Bank, 1991). The issue of inefficiency in the use of productive capital rotates on financial management principle (Uzochukwu, 2003). Government Corporation in Enugu State are not exceptions. They are currently being challenged by a catalogue of problems such as inadequate finance and the satisfaction of the members of public who are their employers. Government budgetary allocations and subventions to Government Corporation for their maintenance have not been able to provide goods and services to a reasonable standard. These problems have persisted over the years.
The management of Government Corporation had always shifted the blame for these failing features to their poor financial base without taking into cognizance the investment management practices that are explanatory defence for poor performance in public enterprises. Government had appreciated the fact that there is a relationship between investment management practices of Government Corporation and the achievement of their growth objectives which is dependent on high returns on invested capital. It is because of this obvious relationship, that the government had always directed the management of Government Corporation to improve their investment management practices in order to invest in viable projects for the enhancement of their financial returns. Quite a number of public sector-enterprises are operated without respect to financial cost or returns (Adeyemo, 2010). Investments in most public sector enterprises are not guided by conceptual and analytical theories. This means that these Government Corporation adopt traditional approaches which include episodic financing and non-consideration of the relationship between financing – mix and cost of capitals as investment management practices. Impliedly, investment decisions in some Government Corporation are made without instituting proper investment management practices which include: capital budgeting decision practices, proper control practices and motivation practices. Thus, the problem is that the management of Government Corporation in Enugu State, Nigeria failed to adopt appropriate investment management practices in their investment portfolio.
Based on this problem therefore, we pose the following research questions:
- To what extent have capital budgeting decision practices (investment appraisal techniques) been instituted in Government Corporation in Enugu State to enhance the selection of profitable investment?
- To what extent have proper control mechanisms been instituted in Government Corporation in Enugu State to promote financial and materials returns in the enterprises?
- Are employees of Government Corporation in Enugu State motivated to enhance their commitment and participation in investment generation and revenue collection strategies?
1.3 Objectives of the Study
The broad objective of this study is to analyse the effect of funding on the performance of government corporation in Nigeria. The specific objectives of this study are to:
- Examine the extent to which capital budgeting decision have been adopted in Government Corporation in Enugu State for the enhancement of profitable investment.
- Find out the extent to which proper control practices have been instituted in Government Corporation in Enugu State to enhance financial and materials returns in the enterprises.
- Find out how the employees of Government Corporation in Enugu State have been motivated to enhance their participation in investment generation and revenue collection strategies.
1.4 Significance of the Study
This study is significant in that it brings into focus the modern approach to financial management techniques which if properly applied in Government Corporation can enhance their productivity and invariably their growth.
Modern approach to investment management focuses on analytical approach which entails using modern financial management theories of project appraisal techniques, control techniques motivation techniques among others (Pandey, 1991). Specifically the study is significant in that it studies capital structure, expenditure planning phases, in vestment idealization, cashflow estimation and evaluation of investment proposals in public enterprises. Practically, the study is significant in that it uses the principle of capital rationing for the allocation of resources to investment proposals. Capital rationing advocates investing in economically viable projects whose net present value is greater than zero. This will be demonstrated in the research findings. The institution and the adoption of appropriate investment management techniques in Government Corporation will promote the productivity of public enterprises’ capital for the upliftment of the enterprises and the society they were established to serve. The study is significant in that it collects information from Government Corporation on how, where, when and the type of the management practices they adopt in investment for investment selection.
This work is of immense benefits to financial management practioners, public administrators, public policy makers, public financial administrators, the managers of Government Corporation in general and the students. It can be a reference material for them.
1.5 Scope and Limitations of the Study
1.5.1 Scope
The study addresses funding on the performance of government corporation in Nigeria. The study specifically focuses on the management of capital investment decisions, capital structure, working capital, inventory and receivables among others. This means that the study covers the areas that guide how the resources of enterprises are to be used for the maximization of the enterprises’ welfare as well as the welfare of the society. The study covers the year 2006 to 2011. This period was chosen because the period marked the era of turn-around maintenance of government owned enterprises. Turn-around maintenance is not only restricted to physical reconstruction. It goes beyond that to capture turn-around management of public enterprises. Turn-around management includes the adoption of appropriate investment management practices in Government Corporation for their growth for efficient service delivery.
1.5.2 Limitations of the Study
In this work’s background and literature review, we used authors and empirical studies from Nigeria and outside Nigeria. The empirical part of this thesis that is the questionnaire and oral interview was strictly done from the perspectives of the workers of Government Corporation in Enugu State.
It was our intention to cover as many Government Corporation as possible in Nigeria but due to the economy of scope we were only able to use Government Corporation in Enugu State. Finally inspite of our efforts to involve all Government Corporation in Enugu State
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