Impact Of Public Finance Management Reforms On Financial Performance Of Public Enterprises

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Impact Of Public Finance Management Reforms On Financial Performance Of Public Enterprises


Abstract


The emergence of financial management as a major contributor to the analysis of investment and financing decisions has continues to respond to external economic and technical developments. The improvements in the efficiency and regulation of financial markets, has provided a better basis of the development for financial theory and its practical application. This research work examine the impact of financial management strategies in the management of public enterprise with special reference to Nigeria National Petroleum Corporation (NNPC).The study used descriptive statistics such as frequency, percentages, mean and standard deviation to show the distribution of responses inferential statistics, regression in particular was used to show the relationship between the dependent and the independent variables. The study findings revealed that the respondents indicated that the credibility of the organizations budgets influenced the financial performance of the organization to a great extent. The findings further show that according to respondents, the comprehensiveness and transparency of the budget impacted the financial performance of the organization to a great extent. The results also show that the respondents indicated that the predictability and control in budget execution impacted the financial performance of the organization to a great extent. The results revealed that according to the respondents, the external scrutiny and audit influenced the financial performance of the organization to a great extent. The respondents further stated that the policy based budgeting in the organization influenced the financial performance of the organization to a very great extent. From the study findings, respondents indicate that both the accounting, recording and reporting and donor practices impacted the financial performance of the organization to a great extent. The study recommended that the government should expand the implementation in PFM reforms in other state corporation so as to enhance their financial performance, 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 the organization despite showing potential and the government should strengthen such factors as credibility of the budget, policy based budget and donor practices for sustainability of the profitability of the organizations.


Chapter One


Introduction

1.1 Background to the Study

Raising and utilizing funds efficiently and effectively has been a major source of concern to all financial managers both in the corporate World and Public Sector all over the world. The prime purpose of establishing a firm is to ensure that returns will not only be sufficient to meet the cost of funds but also enough to satisfy the wealth of maximization objective of the firm, thus, raising finance for corporate bodies has become important.

Financial management can thus, be described as the management planning and controlling of financial resources of a business to achieve the objectives of the business. It has long been considered as a branch of Economics but in the early 20th century it emerged as a separate discipline. It can also be defined as the identification of the possible strategies capable of maximizing an organization Net Present Value, the allocation of scarce resources among the competing opportunities, and the implementation and monitoring of the chosen strategy so as to achieve stated objectives.

Financial management as a subject is of growing interest to both academics and financial manages. On its emergence, it dealt with only the instruments, institutions and procedures in the capital market it later dealt with keeping records and reports, establishing funds (external financing) monitoring cash position and paying bills. It also deals with the concepts, assumptions, principle and techniques underlying the major financial decisions of the enterprises financial management connotes responsibility for obtaining and effectively utilizing the funds necessary for the efficient operation of an enterprise. The finance function Centre around the management of funds, raising and using them effectively. It therefore covers all functions concerned in attempting to ensure that financial resources are obtained and used in the most effective way to secure attainment of the objectives of the organization.

It provides the background for though understanding of the nature, theories and critical issues relating to modern financial management. It thus serves as a necessary background to a more advanced treatment of the investment financial decision.

Financial management today now includes a rigorous analysis of investment of organization’s funds in assessing and obtaining the best mix of financial and dividend in relation to overall market valuation of a firm.

The field is still changing with ideas and techniques. The historical background of the company under review is thus: Nigeria National Petroleum Company (NNPC) was established on April 1977 under the statutory instrument Decree No. 33 of the same year by a merger of the Nigeria National Oil Corporation operational functions and the Ministry of Mines and Power with its regulating responsibility, this decree established NNPC, a public organization that would on behalf of government adequately manage all government interest in the Nigeria oil industry.

In addition to its expiration activities, the corporation was given powers and operational interest in refining petrochemicals and products transportation as well as marketing. Between 1978 and 1989, NNPC constructed refineries in Warri, Kaduna and Port Harcourt and took over 35,000 barrel shell refinery established in Port Harcourt in 1965.

In 1988, the NNPC was commercialized into 12 strategic business units covering the entire spectrum of oil industry operations; exploration and production gas development, refining, distribution, petrochemical engineering and commercial investment. The subsidiary companies include:

  1. National Petroleum Investment Management Services (NAPISMS)
  2. Nigeria Petroleum Development Company (NPDC)
  3. The Nigerian Gas Company (NGC)
  4. The Products and Pipelines Marketing Company (PPMC)
  5. Integrated Data Services Limited (DSL)
  6. Nigeria LNG Limited (NLNGN)
  7. National Engineering and Technical Company Limited (NETCO)
  8. Hydrocarbon Services Nigeria Limited (HYSON)
  9. Warri Refinery and Petrochemical Co. Limited (WRPC)
  10. Kaduna Refinery and Petrochemical Co. Limited (KRPC)
  11. Port-Harcourt Refining Co. Limited (PHRC)
  12. Eleme Petrochemicals Co. Limited (EPCC)

In addition to these subsidiaries, the industry is also regulated by the Department of Petroleum Resources (DPR) a department within the Ministry of Petroleum Resources. The DPR ensures compliance with industry regulations processes applications for licenses, leases and permits establishes and enforces environment regulations. The DPR and NAPIMS play a very crucial role in the day to day activities throughout the industry.

The NNPC is by law a joint venture between the Nigerian Federal Government and a number of foreign multinational corporations, which includes Royal Dutch Shell, Exxon-Mobil, Agip, Total fina Elf, Chevron and Texaco (though now merged with Chevron). Through collaboration with these companies, the Nigerian government conducts petroleum exploration and development.

According to the Nigerian constitution, all minerals, gas and oil in the country possess are legally the property of the Nigeria Federal Government.


1.2 Statement of Problems

The basic role of finance can be described within the context of organizations financial requirement and their management for acquiring necessary resources, for effective operations in public enterprises.

In order to achieve the aims and objectives of the research study, the research study will attempt to provide answers to the following questions.

  1. What is the relationship between risk and return?
  2. What is the relationship between investment and finance?
  3. What is the implication of maximizing shareholders wealth as against shareholders wealth?

1.3 Objectives of Study

The objectives of study were;

  1. 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.
  2. To determine the effect of the Public Finance Management Reforms on the financial performance of Public enterprises in Nigeria.

1.4 Statement of Hypothesis

The hypothesis designed to solve problems identified in public enterprises (a case study of NNPC).
Hypotheses to be tested :

Hypothesis One
  • Ho: Financial management does not play a major role in a Public Sector.
  • H1: Financial management plays a major role in a Public Sector.
Hypothesis Two
  • Ho: Public enterprises do not maximize stakeholders’ wealth.
  • H1: Public enterprises maximize stakeholders’ wealth.

1.5 Significance of Study

The purpose of this study is aimed at studying the relevance of financial management and its contribution in an enterprise. This would be appreciated when it is remembered that in a business concern organized to produce a profitable return to those who have invested in it (stakeholders), the objectives of management is to maximize such returns, and financial management is a technique that can be of assistance in attaining such maximization.

The significances of this study will be appreciated in the following area which includes:

  1. Merit of having a suitable financial management in a public enterprise.
  2. To show the effectiveness of financial management in the public enterprise.
  3. To show that financial management helps in the co-ordination of other sectors in the enterprise.
  4. It could also serve as a reference pint to those who might want to carry out research in similar areas of study.

1.6 Scope and Limitation

The scope of the project is limited to a public enterprise. For the purpose of this study, the scope will cover the role of financial management and its relevance in a public enterprise. All investigation and researchers of this write up shall be limited to Nigeria National Petroleum Corporation (NNPC). Where facts on the role played by financial management would be highlighted. This project will be limited by time constraint and financial constraint and also non-cooperation on the part of the workers.


1.8 Definition of Terms

Financial Management:

The managerial planning and control of financial resources of a business to achieve the objectives of the business.

Financial Managers:

This is a key manager who is responsible for the day to day financial services and record keeping of the organization.

Investment Decision:

This involves the identification of viable projects using various techniques to determine those that are viable.

Financing Decision:

This involves the identification of the appropriate sources of finance that would be used to finance the projects.

Dividend Decision:

This is the determination of the appropriate amount to be paid as dividend and the profit that would be ploughed back to finance expansion in the company.

Stakeholders:

This is a coalition of a group of people that has a stake in what the company does. It comprises of equity shareholders, preference shareholders, lenders, employees, suppliers and customers.

Public Enterprises:

These are governmental organizations which are run in the interest of the society as a whole and they might be a gap between the benefits they provide to society and the cost of their operation.

Finance:

This is the management of money (i.e. the management of the flows of money through an organization and claims against money).

Objectives:

This slates precisely what into be achieved and when the results are to be accomplished.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

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 NNPCto 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 NNPCto a great extent (mean score 3.58). The respondents further stated that the policy based budgeting in NNPC influenced the financial performance of NNPCto 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.


5.2 Conclusions

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.


5.3 Recommendations

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.


5.4 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.


5.5 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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