(a) The objectives of the nationalized electricity supply industry are likely to be strongly influenced
by the government and may not be primarily financial. State owned enterprises exist to
provide a service and to ensure that social needs are satisfied: they are not usually profit
maximizing. The prime objective of a nationalized electricity supply industry might be to
promote the development of an efficient co-ordinated and economic system of electrical
supply with subsidiary objectives concerned with earning an acceptable return on capital
employed (acceptable being defined by the government) and achieving efficiency through cost
control. Service considerations might mean the provision of electricity facilities to remote
areas at far less than the cost price. In order to provide reasonably priced electricity for all
people a government might be prepared to subsidize the nationalized industry and set a
negative target return on capital. Alternatively the target return might be set such that the
industry is a substantial contributor to government finances.
The objectives of a private sector electrical supply company will mainly be determined by the
senior management of the company. The prime objective of a company is mainly the
maximization of shareholders wealth. In practice they might be content to achieve a "satisfying
level of shareholders wealth" and also be concerned with a number of non-financial objectives.
Such objectives include market share, growth, environmental factors, good working conditions
and to facilitate employee and corporate survival. Some of these non-financial objectives will
strongly affect the financial success of the company and shareholders wealth. A vital industry
like provision of electricity, even if privately owned, might still be subject to strong government
influence and constraints especially in provision of services and pricing.
(b) Strategic investment planning in a nationalized industry is subject to government approval.
Small scale investments will be planned and approved by the management of the nationalized
industry. However, the amount of investment undertaken is likely to be influenced by the
government and the use of external sources from the capital market will usually be limited by
the government.
Strategic investment planning in the private sector is strongly influenced by market forces with
managers considering the possible effects of investments on share prices and shareholder's
wealth. Private sector investment appraisal techniques usually assume that the company is
seeking to maximize shareholders wealth in an efficient market. As there are no share prices in
a nationalized industry and investor wealth maximization is not the assumed objective, some
private sector investment appraisal techniques will not be appropriate. However, this does not
mean that all private sector techniques cannot be used in the public sector. Discounted
cash flow for example is often used in a nationalized industry.
Kavungya answered the question on April 13, 2021 at 07:48
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