What is 'Corporatization'

Corporatization is the act of reorganizing the structure of a government-owned entity into a legal entity with the corporate structure found in publicly traded companies. These companies tend to have a board of directors, management and shareholders. However, unlike publicly traded companies, the government is typically the company's only shareholder and that the shares in the company are not traded publicly.

BREAKING DOWN 'Corporatization'

The main goal of corporatization is allowing the government to retain ownership of the company but still enable it to run as efficiently as its private counterparts because government departments sometimes are inefficient with the level of bureaucracy involved.

Furthermore, the government may one day feel that the private sector could do a better job of running the company, possibly conducting an offering on the stock market in order to divest it.

Key Features of Corporatization

  • Separate legal entity: the organization is a legal independent entity
  • Managerial autonomy: management has control over all inputs and issues related to production of services
  • Transparency and reporting: the utility is likely to become subject to prevailing company law and accounting rules
  • Assets and Liabilites - the corporatized utility will have transferred to it the resources it needs to perform its functions and to be viable. It may be that it is inappropriate to transfer all associated debt to a corporatized entity if the utility is unlikely to be able to raise revenues to service the debt and fund existing operations

The Corporatization Trend

Governments around the world are contributing to a trend of taking back control of services that been sold or contracted out to the private sector. This is corporatization, and it has become among the most popular forms of modern government ownership of enterprise. Corporatized agencies are fully owned and operated by the state, but have separate legal and financial status. Water and electricity utilities are common examples of this type of corporatization, but the practice extends to a much wider range of goods and services, from airports to universities and hospitals.

The goal of corporatization is to create arm’s-length enterprises with independent managers who are expected to account for costs and revenues as though they were operating a stand-alone company. This is intended to create greater financial transparency, reduce political interference and strengthen managerial accountability.

Intent of Corporatization

Corporatization, or the adoption of more business-like practices by government agencies, has been shown to lead to improvements in performance. However, why it works as such is not well understood. There are competing theories as to how corporatization may improve performance, but because of confounding factors, empirical studies have difficulty in identifying causal relationships.

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