Problems of Public Corporations
Public corporations face several problems some these problems are explained below:
- The problem of Poor project planning
When money is being invested in public corporations, the managers do not base their investment decisions on a good assessment of the market forces of demand and supply. Cost of production is not weighed against how much benefit could be derived from the investment. The result is that the cost of operation is highly inflated. Furthermore, because there is lack of proper planning, projects delay and some never get executed. In addition, because planning is poorly done, managers are confused between taking decisions that will make profit or just offering social service to the public.
- The problem of Over-capitalization
One outcome of poor planning is that the finances of public corporations are also not properly planned. As a result, their expenditure is not well controlled. This lack of effective financial control coupled with easy access to money from the Government produces what is referred to as over-capitalization. Over-capitalization describes a situation where an organization has more capital than it needs. This makes the firms asset worth less than the share capital issued by the firm, and its earnings are not sufficient enough to pay dividend on the shares it issues. An over-capitalized firm is also not able to make enough money to pay interest on its debts; a sad state for any firm to find itself in. Wastage of scare capital resources and high capital-output ratio are some of the consequences for over-capitalized corporations.
- The problem of High establishment costs
Public corporations are often in the habit of spending heavily on social infrastructure such as schools built specially for the children of their workers, hospitals, housing and similar such infrastructure to show that they are good employers so as to attract skilled employees into their fold. These infrastructures once built will call for more money to maintain and run them. In the final analysis the cost of running public corporation become so huge that it lowers their ability to make profit in the long run.
- The problem of Over-staffing
Another thing that results from the poor planning in Public Corporations is that they are not able to determine the number, quality, skill level of the people they must employ within a certain time period. This lack of proper manpower planning creates a situation where people are employed as unplanned response to minor issue. Ultimately leading to over-staffing. When a corporation becomes overstaffed, it must pay more employees than it actually needs to function properly. A huge wage bill will further make their operations less profitable.
- The problem of Political interference
Public corporations also suffer from too much interference, in the way it is managed, by politicians. Sadly, suggestions coming from these politicians are often meant to score political points against opponents or favour political allies and not to make a business savvy advice. Some public corporations are placed under parliamentary control which reduces their autonomy and freedom to make quick decisions that would bring profit to the corporation.
- The Problem of Under-utilization of capacity
One serious problem of the public sector has been low utilization of installed capacity. Because of the fact that public corporation do not have definite targets of production, no sales targets, and ineffective assessment of their future needs and how to meet them, they find themselves operating at a level well below their installed capacity. Operating below capacity means that public corporations are not making full use of their fix assets,(plants, building, equipment etc); a situation which can lead to poor business performance and financial loss to the firm