Public Corporations Flashcards

Public Corporations

Learning Objectives

• Understand the features of public corporations.
• Understand the ownership, control, sources of finance, and use of profits for public corporations.
• Understand the reasons for and against public ownership.
• Understand the nature of, and reasons for, privatization.

Starter Activity

• Recall five key learnings from the previous lesson on limited companies and multinationals.

Definition of Public Corporations

• Business organizations owned and controlled by the state/government.

Global Presence

• In most countries, governments undertake some business activity through controlled organizations.
• These corporations are not owned by individuals and have different objectives compared to private companies.
• They often provide essential public services like healthcare, transport, and education.
• In some countries, they also provide commercial goods and services like banking, oil production, and energy.

Features of Public Corporations

• State-owned: The government owns the corporations and appoints the board of directors to manage them.
• Created by Law: Established through an act of parliament, which clearly specifies their powers and duties.
• Incorporation: Possess a separate legal identity, allowing them to sue, be sued, and enter into contracts under their own name.
• State-funded: The government provides the necessary capital, derived from tax revenues, to operate the company. All equipment belongs to the government.
• Provide public services: Their primary objective is to deliver public services rather than generate profit.
• Public accountability: They must produce annual reports submitted to the relevant government minister and are accountable to taxpayers.
  • Profits are either reinvested into the business or given to the government.

Mini Plenary

• Assess whether the features of public corporations are well understood.

Case Study: SNCF Group

• SNCF Group is a global company that provides passenger and freight transport services, consisting of three enterprises: SNCF, SNCF Réseau, and SNCF Mobilités.
• SNCF Réseau is France's state-owned railway company, an établissement public industriel et commercial (EPIC), owned by the French state.
• Mission: To provide a nationwide railway network, committed to customer satisfaction and social progress, promoting regional growth and development throughout France.
• Recent projects:
  • Improving punctuality for commuters.
  • Simplifying fare structures.
  • Enhancing accessibility for all, including people with disabilities, through station and train improvements.
• Financial Performance: Generated revenues of €32,273 million in 2016 (2.8% higher than the previous year) and made a net profit of €567 million.
  • Significant improvement from 2015 when it made a net loss of €12,228 million despite investing over €4,000 million in infrastructure.

Student Activities Based on SNCF Case Study

1. Describe three features of a public corporation, using the SNCF case study as an example.
2. Determine who will take financial responsibility for the losses made by SNCF in 2015.

Reasons for Public Ownership

• Avoid Wasteful Duplication: More efficient to have one business providing a service, especially in industries needing large infrastructure (e.g., rail and water). This leads to a natural monopoly, where one organization meets customer demands.
• Maintain Control of Strategic Industries: Vital industries for national security (e.g., energy and water) should be owned by governments to prevent exploitation by outsiders. The government prioritizes the country's well-being.
• Save Jobs: Government takes control of failing businesses to prevent job losses, considering it better to absorb financial losses than lose employees.
• Fill Gaps Left by the Private Sector: Provides essential services that the private sector cannot or will not provide. For example, offering free education when private schools are only accessible to those who can afford them.
• Serve Unprofitable Regions: Delivering important services that the private sector avoids due to high costs, as public corporations prioritize service over profit.

Reasons Against Public Ownership

• Cost to Government: Many public corporations operate at a loss, which is covered by taxpayers. Growing and frequent losses may lead to taxpayer dissatisfaction.
• Inefficiency: Public corporations are often criticized for low productivity and inefficiency, such as delays in trains and buses, attributed to a lack of competition. These companies are protected from bankruptcy as the government covers their losses.
• Political Interference: Excessive government intervention. Changing government policies can lead to constantly shifting rules and regulations for public corporations.
• Difficult to Control: Large size, with thousands of employees and numerous assets across vast regions, makes coordination difficult.

Privatization

• Transferring public sector resources to the private sector.
• Many countries have reduced their number of public corporations, with industries like rail transport, water provision, electricity generation, and telecommunications being privatized, particularly in the UK.
• Forms of Privatization:
  • Sale of public corporations.
  • Deregulation.
  • Contracting out.
  • Sale of land and property.

Sale of Public Corporations

• Selling shares in the business to the public.
• The sale can be phased, as demonstrated by the Australian government's sale of Telstra in three parts.

Deregulation

• Removing legal restrictions that prevent private sector competition.
• Deregulation in the UK telecommunications sector allowed companies like SKY to compete with British Telecom.

Contracting Out

• Government and local authority services contracted to private sector businesses.
• Private sector companies bid for services previously provided by the public sector (e.g., school meals, hospital cleaning, refuse collection).

Sale of Land and Property

• Selling council-owned properties to tenants, often with generous discounts.

Why Does Privatization Take Place?

• To Generate Income: Sale of assets generates income for the government.
• To Reduce Inefficiency in the Public Sector: Private sector firms are incentivized to cut costs, improve services, and generate profits for shareholders.
• As a Result of Deregulation: Removing legal barriers encourages new firms to enter markets, like bus and coach services, leading to the privatization of existing firms.
• To Reduce Political Interference: Private sector organizations are free from government influence and can independently choose investment levels, prices, product ranges, and growth rates.

Plenary: Complete the Sentences

• The ownership of public corporations is the state.
• Control of public corporations is by the board of directors who are appointed by the government.
• The main source of finance for public corporations is taxes (from taxpayers).
• Most public corporations do not aim to make a profit.

Case Study: Airport Privatization

• Historically, governments preferred to retain ownership of airports due to their importance to the nation.
• Until recently (2006), only around 2% of the world's airports were privately owned or managed.
• There has been rapid growth in airport privatization in recent years.
• Examples:
  • In 2014, the Indian Aviation Authority planned to sell Sardar Vallabhbhai Patel International Airport in Ahmedabad.
  • In 2013, the Brazilian government raised US9,100 million by privatizing two major airports before the 2014 World Cup.
  • In 2016, Brazil aimed to raise an additional US1,400 million by selling stakes in five airports to reduce its budget deficit.
• Motive for Privatization: Airports are likely to be run more efficiently in the private sector.
  • Ahmed Bukalla (Director of Operations, Department of Civil Aviation, Sharjah International Airport, UAE) suggests privatization increases pressure for productivity gains and innovation.

Homework Questions

1. What is meant by the term privatization?
2. Why were governments keen to maintain state control of airports until recently?
3. Describe two possible reasons why governments should want to privatize airports.

Plenary: Multiple Choice Questions

1. Which industry benefits from having only one operator?
   • C. Natural monopoly
2. Which is a feature of a public corporation?
   • B. It is funded by the government
3. What is the transfer of public sector resources to the private sector called?
   • D. Privatization
4. Which of the following is a reason against public ownership?
   • A. Public corporations may be too large and difficult to control