BPA 124 Public Corporate Finance PDF

BPA 124 PUBLIC CORPORATE FINANCE WHAT IS PUBLIC ENTERPRISE? PUBLIC ENTERPRISE “Any commercial, financial, industrial, agricultural or promotional undertaking – owned by public authority, either wholly or through majority shareholding – which is engaged in the sale of goods and services and whose...

BPA 124 PUBLIC CORPORATE FINANCE WHAT IS PUBLIC ENTERPRISE? PUBLIC ENTERPRISE “Any commercial, financial, industrial, agricultural or promotional undertaking – owned by public authority, either wholly or through majority shareholding – which is engaged in the sale of goods and services and whose affairs are capable of being recorded in balance sheets and profit and loss accounts. “ (ICPE).  PUBLIC ENTERPRISE Mendoza (1990) elaborates more on the classical, dualistic definition of public enterprises by elaborating on the ‘public’ and ‘enterprise’ dimensions. PUBLIC SIDE PUBLIC INTEREST 1 PUBLIC OWNERSHIP 2 3 PUBLIC CONTROL PUBLIC OWNERSHIP 4 PUBLIC 5 ACCOUNTABILITY ENTERPRISE SIDE 1 ORGANIZATION 2 DECISION-MAKING COMMERCIAL IDENTITY 6 ACCOUNTING SYSTEM 3 PROVISION OF GOODS AND SERVICES 4 MARKETING FACTOR 5 INVESTMENT AND RETURN  PUBLIC ENTERPRISE In the Philippine setting, public, corporations have been called many names: government corporation, public corporation, public enterprise, state-owned enterprise, parastatal corporation, The official nomenclature is "Government Owned or Controlled Corporations" (GOCCs) as stated in the 1973 Constitution. This is the' term used in the study. The international term is "public enterprise." PUBLIC ENTERPRISES REFER TO: GOCC’s are companies that are owned or controlled by the government. LEE’s are businesses owned and operated by Local Government Units, such as cities or municipalities.  WHAT IS CORPORATION? REPUBLIC ACT NO. 11232 THE REVISED CORPORATION CODE OF THE PHILIPPINES Sec 2 A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence.. CHARACTERISTICS It is an arteficial It has right of being succession It has power, Created by attributes, and operational of law properties expressly authorized by law or incidental to its nature  GOCC Refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its stock capital.  GOCC Different Forms of GOCCs: Government Instrumentalities with Corporate Power (GICP) Government Corporate Entities (GCE) Government Financial Institutions (GFI) Subsidiaries of GOCCs CHARACTERISTICS OF GOCC Business enterprise of the government Government ownership, management and control Service motive Autonomy Public accountability Separate legal status Continued existence WHAT ROLE SHOULD PUBLIC ENTERPRISE PLAY IN FOSTERING ECONOMIC DEVELOPMENT AND SOCIAL EQUITY IN THE PHILIPPINES? 1. ADDRESSED MARKET FAILURE 2. PROVIDE ESSENTIAL SERVICES 3. REDISTRIBUTION OF WEALTH 4. PROMOTING INCLUSIVE GROWTH  THE ROLE OF GOCCS WIDE SPREAD GROWTH OF GOCCS A rapid growth in the number and size of these enterprises has been observed in the developing countries for the last few decade. Add a Footer 1 Once present only in traditional activities such as in utilities (electricity, gas, and water), and transportation and communications, public enterprises “have become active in such key sectors as large-scale manufacturing, construction, finance, services, natural resources, and agriculture.” 2 In the Philippines, its average gross value added in manufacturing for the period 1975 to 1984, is relatively low about 1% while in financing, which had been mostly a private sector activity in the past, a high 33%. As of 1985, there are more public enterprises in the manufacturing sector (19% of total) than in any other sector. In agriculture, forestry and fishery, there are 20 of these corporations (or 8%). 3 “Overall, it is clear that the state-owned enterprise (SOEs) are playing a major role in the economies of developing nations, contributing an average of 7% to 15% of their GDPs. In some cases, their contribution is considerably higher; for example, they produce 20% to 30% of the domestic output in Senegal, Guinea, Tunisia, and Venezuela and almost 40% of the output in Ghana and Zambia. TODARO (1989). 4   Monopoly  Capital formation REASONS  Private incentive (acc to BRIONES)  Control in strategic sectors  Other reasons Add a Footer 5  To ensure that prices are not set above output costs, direct government control in many Third MONOPOLY World countries may be required. Thus, the private sector has no incentive to produce such goods, and the government must take care of their provision. Add a Footer 6  Especially strong at the early phases of development when private savings are low. CAPITAL FORMATION Investment in infrastructure is vital for laying the groundwork for further investment (massive funds) Add a Footer 7  The lack of private incentive to engage in promising activities because of: (a) PRIVATE uncertainty about the size of local markets; (b) INCENTIVE unreliable resources of supply; and (c) the absence of technology and skilled labor is another motivation for creating public enterprise. Add a Footer 8  The desire of the governments to gain national control over CONTROL IN “strategic sectors” of the STRATEGIC economy such defense, or over “foreign-owned SECTORS enterprises” (MNCs) whose interests may not coincide with those of the country, or over key sectors for planning purposes. Add a Footer 9  (a) bankruptcy of major private industries which necessitates OTHER government to take- REASONS over; and (b) (b) ideological motivations, among others. Add a Footer 10  A TECHNICAL SUPPORT SEPO (SENATE ECONOMIC OFFICE WITHIN THE PLANNING OFFICE) PHILIPPINE SENATE THAT PROVIDES LEGISLATORS WITH RESEARCH, ANALYSIS, AND POLICY RECOMMENDATIONS Add a Footer 11  1. In cases where private sector is unwilling or unable SENATE ECONOMIC to provide goods PLANNING OFFICE (SEPO) and services vital to society such as the construction of large infrastructure, i.e., roads and ports; Add a Footer 12  2. When there is a need to create bias in SENATE ECONOMIC favour of PLANNING OFFICE (SEPO) disadvantaged sector of the society in a free market operation such as distribution of staples like rice and sugar; Add a Footer 13  3. To spur the development of strategic activities with wide- ranging economic SENATE ECONOMIC impact; and PLANNING OFFICE (SEPO) 4. When there exist natural monopolies which government wants to control to protect the consuming public. Add a Footer 14  1. It is grounded in the idea that market failure do exist. Government needs to ADDITIONAL THOUGHTS intervene to protect public interest. 1. The use of corporate vehicle recognize as efficient means to mobilize government assets. Add a Footer 15  Presidential Decree No. 2029 defines a Government- owned and controlled corporation (GOCC) as “a stock or a non-stock corporation, whether performing governmental or proprietary functions, which is directly chartered by special law or, if organized under the general corporation law, is THE LEGAL AND POLICY owned or controlled by the government directly or FRAMEWORK indirectly through a parent corporation or subsidiary corporation, the extent of at least a majority of its outstanding capital stock or of its outstanding voting capital stock.” Executive Order No. 64 of 1993 expanded the definition of GOCC as follows: “... a corporation created by special law or incorporated and organized under the Corporation Code and in which government, directly or indirect, has ownership of the majority of the capital stock.” Add a Footer 16  1987 Constitution provides that GOCCs “…may be THE LEGAL AND POLICY created or established by FRAMEWORK special charters in the interest of the common good and subject to the test of economic viability” (Art.XII, Sec. 16). Add a Footer 17  According to the Commission on Audit (COA), as of August 2010, there are 604 GOCCs in the Philippines, 446 of which are THE LEGAL AND POLICY operational water districts. COA FRAMEWORK groups them into three clusters depending on their nature and functions. Cluster A is composed of mostly financial institutions. Under Cluster B are public utilities, and those whose nature are industrial, area development, agricultural, trading, and promotional, while those which are social, cultural, and scientific fall under Cluster C. Add a Footer 18  “The state may, in the interest of national welfare or defense, establish and operate industries and THE LEGAL AND POLICY means of transportation FRAMEWORK and-communication, and, upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the government.” (1973 constitution) Add a Footer 19  GOCCs are important sources of income for the How do GOCCs’ performance national government (NG). Under Section 3 of impact on government Republic Act 7656, all GOCCS are required to finances? declare and remit at least 50 percent of their annual net earnings as cash, stock or property dividends to the national government. Exempted from this rule are GOCCs, which administer real or personal properties or funds held in trust for the use and the benefit of its members. This includes the Government Service Insurance System (GSIS), Home Development Mutual Fund (HDMF), Employees Compensation Commission (ECC), the Overseas Workers Welfare Administration (OWWA), and the Philippine Medical Care Commission. Add a Footer 20  LEGAL FRAMEWORK The 1986 constitution lays down the overall framework for GOCC policy in Article XII, Sections 16-19. These provisions reflect efforts to limit the unwarranted proliferation of GOCCs and ensure economic viability. These provisions likewise reflect recognition of the abuses of the GOCCs which accounted for their substantial contribution to the crisis of the 80’s. 21  LEGAL FRAMEWORK Thus, Section 16 provides that only Congress may create GOCCs “in the interest of the common good and subject to the test of economic viability.” The latter is reflected clearly in P.D. 2029 Section 17 emphasizes that the state may take over privately owned public utilities or business affected with public interest only during national emergencies and on temporary basis. 22  LEGAL FRAMEWORK Another provision in the constitution seeks to regulate foreign borrowings of GOCCs. Section 20 Article II provides that the Monetary Board shall submit quarterly reports to Congress on its decisions for application for loans “to be contracted or guaranteed by the government or GOCCs. 23  LEGAL FRAMEWORK While the constitution regulates and seeks to limit the use of the government corporation form, it emphasizes at the same time the leading role of the private sector in the economy. Thus, Article II, section 20 recognizes the “indispensable role of the private sector, encourages private enterprises, and provides incentives to needed investment. 24