Impact of Public Finance Management Reforms on Financial Performance of Public Enterprises
Objectives of Study
The objectives of study were;
i). To undertake a comprehensive stock-taking, review and synthesis of lesson about designing, implementing and assessing public financial management (PFM) reform initiatives amongst Public enterprises in Nigeria.
ii). To determine the effect of the Public Finance Management Reforms on the financial performance of Public enterprises in Nigeria.
This chapter summarizes the information from other researchers who have carried out research in similar field of study. The specific areas covered are review of literature on theories that guide study, empirical studies that relate to factors determining the impact of Public Finance Management Reforms on financial performance of NNPC’s.
Review of Theories
Modern portfolio theory
Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. By combining different assets in a Public enterprise whose returns are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio return. MPT also assumes that investors are rational and markets are efficient (Clark et al., 2013)
Elton (2009) states that MPT assumes that investors are risk adverse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one.
Thus, an investor in a Public enterprise will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher expected returns must accept more risk. The exact trade-off will be the same for all investors, but different investors will evaluate the trade-off differently based on individual risk aversion characteristics.
The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favourable risk–expected return profile – i.e., if for that level of risk an alternative portfolio exists that has better expected returns. Note that the theory uses standard deviation of return as a proxy for risk, which is valid if asset returns are jointly normaly distributed or otherwise elliptically distributed (Clark et al., 2013).
Public enterprises can reduce portfolio risk simply by holding combinations of instruments that are not perfectly positively correlated (correlation coefficient). In other words, they can reduce their exposure to individual asset risk by holding a diversified portfolio of assets.
Two Mutual Fund Theorem
One key result of the analysis of risk and return is the two mutual fund theorem. This theorem states that any portfolio on the efficient frontier can be generated by holding a combination of any two given portfolios on the frontier; the latter two given portfolios are the “mutual funds” in the theorem’s name (Bailey, 2008).
So, in the absence of a risk-free asset, a Public enterprise can achieve any desired efficient portfolio even if all that is accessible is a pair of efficient mutual funds. If the location of the desired portfolio on the frontier is between the locations of the two mutual funds, both mutual funds will be held in positive quantities. If the desired portfolio is outside the range spanned by the two mutual funds, then one of the mutual funds must be sold short (held in negative quantity) while the size of the investment in the other mutual fund must be greater than the amount available for Public enterprise investment (the excess being funded by the borrowing from the other fund) (Bailey, 2008).
This chapter mainly outlined the research design, target population and sample, data collection method and data analysis. Data analysis mainly rooted down to the statistical tool, the model and the package that was used thereof. The data was also tested for validity and reliability with the intention of bringing out the credibility of the data.
The research used secondary data. Zikmund et al, (2007) defines secondary data as the data that had previously been collected for some purpose other than the one at hand. On the other hand, a descriptive research describes the characteristics of objects, people, groups, organizations etc. It addresses the what, why, who, when, where and how questions.
Therefore, the descriptive survey is a method that will collect data from the population and help the research to get the process of collecting data in order to answer question regarding the current status of the subjects in the study. Thus descriptive survey was an appropriate as it sought to ascertain the financial performance of Commercial State
Owned Enterprises with relation to the PFMR.
The target population of the study comprised of all staff at NNPC as at November 2013.
DATA ANALYSIS, RESULTS AND DISCUSSION
This chapter dealt with data analysis, presentations, interpretation and discussions of study findings. The presentations were done based on the research questions which formed the sub-headings in the chapter.
A total of 30 financial managers were targeted. Every respondent was given a questionnaire out of which 26 respondents responded by completing and returning the questionnaire. This gave a response rate of 87%. The collected data were edited and coded. Data analysis of the responses was done using frequency, percentages, mean score and standard deviation. Inferential statistics such as regression analysis was used to test the relationship between the financial performance and the independent variables.
SUMMARY, CONCLUSION AND RECOMMENDATIONS
The public finance management reforms were meant to facilitate the provision of crucial public service such as enhanced accountability and transparency by Public enterprises in Nigeria. In addition they were meant to manage the limited financial resources to ensure economy and efficiency in the delivery of outputs required to achieve desired outcomes that will serve the needs of the community. The purpose of study was to determine the effect public finance management reforms on the financial performance of the state corporations in Nigeria. The objectives of the study were to undertake a comprehensive stock-taking, review and synthesis of lesson about designing, implementing and assessing public financial management (PFM) reform initiatives and to determine the effect of the Public Finance Management Reforms on the financial performance of Public enterprises in Nigeria.
The study used descriptive survey design in which both primary and secondary data was used to collect data. The study targeted all the 168 public enterprises in
Nigeria. The researcher sampled 30 state corporations from where it targeted the Finance Managers. The primary data was collected by use of questionnaires. Secondary data comprised of the financial statement and the annual reports. Data was analysed both qualitatively and quantitatively.
The study established that nearly all NNPC (96%) had implemented the PFM reforms. The findings further revealed that most respondents (62%) were conversant with the PFM reforms. The study revealed that majority of the respondents (88%) indicated that the financial management process enforced the public finance management Act 2012. The study established that credibility of NNPC budgets influenced the financial performance of NNPC to a great extent (mean score 3.54). The findings further show that according to respondents, the comprehensiveness and transparency of the budget impacted the financial performance of NNPC to a great extent (mean score 3.31). The results also show that the respondents indicated that the predictability and control in budget execution impacted the financial performance of NNPC to a great extent (mean score 3.77). The results revealed that according to the respondents, the external scrutiny and audit influenced the financial performance of NNPC to a great extent (mean score 3.58). The respondents further stated that the policy based budgeting in NNPC influenced the financial performance of NNPC to a very great extent (mean score 4.12). From the study findings, respondents indicate that both the accounting, recording and reporting and donor practices impacted the financial performance of NNPC to a great extent (mean scores 3.88 and 3.46 respectively). These findings were confirmed by the inferential statistics where the regression revealed that there was a positive relationship between the dependent and the independent variables.
The findings that the financial management process enforced the public finance management Act 2012 support the views of Hitt, et al (2011) where he noted that for the public sector to deliver public service and achieve its policy objectives, it was critical that the public finance was managed well which required a policy or legal framework as it was found that in many other local authorities were characterized by weak administration and poor local financial management. The findings also support the views of Shah (2007) who noted that lack of enforcement due to poorly designed fiscal policies and weak financial management practices would subject NNPC to mismanagement of the public funds.
The findings of the study that the predictability and control of budgets and the predictability and controls in the budget execution enhanced the financial performance of the state corporations are in agreement with Walker et al (2010) that the budgetary processes used by various countries in the management or use of financial resources was intended for financial performance of NNPC. The study findings also agree with CABRI (2005) that budget reporting and budget management were ingredients for organizations financial performance.
The findings of the study on the credibility in NNPC budgets and the effects they have had on NNPC financial performance supported the views of Waema and Adera (2011) that good management of resources which included credibility in the use of the public finance and accountability will enhance the financial performance of public enterprises as they will prevent leakages of public resources and this will lead to enhanced service delivery as wastages will be minimized in the public finance management in state corporations.
The findings of the study where the researcher confirmed that all the state corporations had implemented the public finance management reforms and how it affected the financial performance of these state corporations agree with the position taken by the World Bank (2008) that the reforms in the public finance management will enhance the efficiency and effectiveness in the public resources management which will in turn enhance their financial performance.
As clearly shown in the study findings, all the state corporations in the study had adopted the public finance management reforms in accordance with the Public Finance Management Act 2012 which required all the government agencies including the commercial state corporations adopt the reforms in their management of public finance, the study concludes that all the state corporations have been compliant with the reforms process that have been initiated by the government aimed at improving the management of the public finance which have for a long time been wasteful. The study also concludes that there was a positive change in financial performance of public enterprises in Nigeria which was attributed to the public finance management reforms.
The study further concludes that for a number of these public enterprises, the effectiveness and sustainability once initial performance indicators have been achieved will be dependent on a continuing commitment to recurrent costs. These were achieved through transparency and comprehensiveness of the budgeting process which according to the findings of the study positively influenced the financial performance of the enterprises. The transparency in the budgeting process eliminated the wastages in the expenditure of the public finance through proper management and accountability and ensured proper and prudent allocation of the public resources.
The study also concludes that through the public management reforms, the government has been able to improve the accountability of the donor funds through the PFM cluster scores. Through the accountability the government is able to attract more funds from the local and international donors as more investors are willing to bring in their resources for investment knowing that the likelihood to gain from their investment is high. Hence more public funds for investment in key areas of the country such as education, infrastructure, health and security and improved service delivery to the publics. All these are attributable to the adoption of the public finance reforms in the state corporations.
The study established that the PFM reforms have enhanced the financial performance of the public enterprises as such vices as corruption, outright mismanagement of public funds among others have been minimized if not eliminated. The study recommends that the government should expand the implementation in PFM reforms in other state corporation and all the government agencies so as to enhance their financial performance especially in the public offices where outright mismanagement of public funds .
The study established that the effect of some variables such as comprehensiveness and transparency in the budget and external scrutiny and audit did not have a strong influence on the financial performance of NNPC despite showing potential and despite earlier studies showing a positive influence. The study recommends that the government should strengthen these factors with the view of enhancing their effectiveness in the public finance management process so as to achieve improves financial performance of these commercial state corporations and other government agencies.
The study also established that such factors as credibility of the budgets, policy based budgets and donor practices had insignificant influence on the financial performance of the corporations despite being touted as having ability to turn around the financial performance of the public corporations. The study recommends that the government through its various departments should strengthen such factors as credibility of the budget, policy based budget and donor practices for sustainability of the profitability of NNPC which have otherwise experienced poor financial performance but have the potential of registering higher profits if prudently managed.
Limitations of the Study
Fist was the time and financial constraints. For this reason the study was restricted to the public enterprises which are based in Nigeria.
The fact that the study relied on secondary data may have limited that study in that some of the documents may have used different methods as the study objectives may have been different. This may have resulted into different results.
The study was on the CSO in Nigeria. This may however, have been different from those done by the previous studies and therefore their findings may not fit this study as the most of the reports used focused on the effect of PFM on the performance of the government in general.
The fact that no organization was visited to find out the actual situation may be misleading due to the fact that different organizations perform differently. It may therefore be misleading to generalize the performance of NNPC as either performing or not performing.
Suggestions for Further Studies
This study was carried out on the impact of PFM reforms in the financial performance of public enterprises alone. Similar studies can be replicated in other government ministries.
The PFM reforms were equally initiated in other East African countries like Uganda, and
Tanzania. The study suggests that a comparison study should be undertaken in East African Countries with the aim of determining the impact of PFM reforms on the financial performance of government agencies.
The implementation of the reforms may have encountered challenges, the study suggests that future studies should investigate the challenges facing the implementation of PFM reforms in state corporations.
The study suggests that future research should be done on the effect of the PFM reforms on the general performance of government institutions with the aim of establishing how PFM reforms have enhanced service delivery.
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