URBS 615—Professional Seminar

Tools of Government Ch. 3:  Government Corporations & GSEs


Defining the Tool

These tools are either part of government or an instrumentality of government that are created to carry out a public purpose. 

  1. Criteria:  Based on Harry Truman’s 1948 criteria for creating government corporations, they should be
    1. Of a business nature
    2. Revenue-producing and potentially self-sustaining
    3. Involve a large number of business-type transactions with the public
    4. Require a greater flexibility than the customary type of appropriations budget ordinarily permits
  2. Government Corporation:  A government agency, owned & controlled by the government, but established as a separate corporate entity legally distinct from the rest of the government (of which it is a part)—sort of a “wholly owned subsidiary.”  Examples:  Port authority, housing authority
    1. Generally not suitable for “sovereign” functions
    2. “Off the books”—not subject to appropriation and budget limitations of the rest of the unit of government
    3. Should have a single administrator, rather than a board of directors (absence of shareholders defeats the accountability of a board of directors)
    4. Needs influential constituency to demand high performance of public purpose, but not so influential as to undercut reasonable accountability
    5. Likely to focus on financial returns, perhaps to detriment of public purpose
    6. Likely to be resented by potential competitors in the market
    7. Profitability likely to be undercut by more nimble and flexible market-based competitors.  The market will tend to “skim the cream” from the customer base.
    8. Charter should specify periodic reauthorization
  3. Government-Sponsored Enterprise (GSE):  A chartered, privately owned and controlled institution with statutory privileges (such as tax benefits, regulatory exemptions, reduced cost of borrowing).  Constrained by charter to serving specific market segments through limited range of services.  Examples:  No local government examples given (Fannie Mae & Freddie Mac mentioned most often).
    1. Need arises because some market imperfection limits ability of private sector to otherwise meet an important public need; if no market imperfection, a GSE will not flourish without heavy subsidies.
    2. Can leverage its shareholder capital more heavily, due to regulatory relief
    3. May be organized as investor-owned or as cooperatives.  To limit monopolistic tendencies,

                                                               i.      Coops will not compete with member-owners

                                                             ii.      Multiple grants of charter will constrain investor-owned model.

    1. Creates risk of financial exposure to sponsoring government
    2. To limit risk that financial  gain displaces public purpose (stockholders’ needs will be served first by managers), may

                                                               i.      Define (and regularly adjust) activities authorized in charter (but stockholders will also be attempting to adjust charter toward profitability)

                                                             ii.      Vest a government agency with power to require specific public service

                                                            iii.      Require that a fixed percentage of income serve public purpose

    1. As GSE develops, the market should mature and might make government sponsorship unnecessary.  Therefore, all GSE charters should include a sunset provision (10-20 years).
    2. “Sorcerer’s apprentice” problem—once GSE uses government benefits to gain market position, government loses ability to control it.


Using the Tool

Government Corporations

Government-Sponsored Enterprises

1.  Identify public purpose & functions

1.  Identify public purpose & functions

2.  Determine (eventual) financial self-sufficiency

         a.  determine fund source if not self-sustaining

2.  Determine financial profitability

        a.  determine that market cannot do it alone

        b.  estimate cost of special privilege

        c.  unprofitable public-purpose activities—

                require support?  Or create tandem

               government program?

3.  Determine organizational location

3.  Determine

           a.  oversight for financial safety

            b. oversight for continuing service

            c,  exit strategy

4.  Draft a charter & enact legislation

4.  Draft a charter & enact legislation

5.  Establish operating structure

       a.  appropriation for first year of operation

       b.  appoint chief executive & other officers

       c.  appoint other officials of the corporation

5.  Establish operating structure

        a.  create interim board of directors

        b.  sell stock in GSE

        c.  hold stockholder election of first board

        d.  appoint chief executive & other officers

         e.  appoint other officials of the corporation

6.  Begin operations

6.  Begin operations



© 2004 A.J.Filipovitch
Revised 9 February 04