Corporatization: What it is, How it Works, Special Considerations

What Is Corporatization?

Corporatization refers to the restructuring or transformation of a state-owned asset or organization into a corporation. These organizations typically have a board of directors, management, and shareholders. However, unlike publicly traded companies, the government is the company's only shareholder, and the shares in the company are not publicly traded.

The aim of corporatization is to create enterprises with independent managers who are expected to account for the business as though they were operating a stand-alone company.

Understanding Corporatization

The main goal of corporatization is to allow the government to retain ownership of the company while allowing the company to run as efficiently as its private counterparts. Government departments are often inefficient due to internal bureaucratic conventions. Additionally, the government may consider that joining the private sector might improve a company's performance. If this is the case, the government might conduct an offering on the stock market to divest the organization.

Key Takeaways

  • Corporatization occurs when a government attempts to reorganize the structure of a government-owned entity into one that resembles a private entity.
  • Corporatization is often applied to utilities such as electricity or water providers.
  • Corporatized companies tend to have a board of directors, management, and shareholders but the government is the only shareholder, and the shares in the company are not publicly traded.
  • The goal of the government is to retain ownership while allowing the entity to operate efficiently and competitively.

Key Features of Corporatized Entities

  • Separate legal entity: the organization is a legal independent entity
  • Managerial autonomy: management has control over all inputs and issues related to production or service delivery
  • Transparency and reporting: the organization is likely to become subject to prevailing company law and accounting rules
  • Assets and liabilities: the corporatized entity will receive the resources it needs to perform its functions and be viable. It may be that inappropriate to transfer all associated debt to a corporatized entity if the entity is unlikely to earn sufficient revenues to service its debt and fund existing operations

Special Considerations for Corporatization

Governments around the world show a trend of taking back control of services contracted out to the private sector, and this trend in corporatization has become a popular form of modern government enterprise ownership. 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. Corporatization is intended to create greater financial transparency, reduce political interference, and strengthen managerial accountability.

Fast Fact

Corporatization has been shown to improve performance in state-owned entities. However, why this is the case is not easy to determine empirically.

Corporatization Intent

Corporatization, or the adoption of more business-like practices by government agencies, has been shown to lead to improvements in performance. However, why this is the case is not well understood. There are competing theories as to how corporatization may improve performance. However, confounding factors make it difficult for empirical studies to identify causal relationships.

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