It is generally said that, government has no business in business to engage citizens and generate profit. But this is not the truth. Governments engage in business activities to make developments in the overall economy or in a particular sector or region. Government constitutional functions are provision of welfare and security of life and properties of the citizens. This could be executed by creating jobs, investing funds, promoting innovations, and increasing competition. The government has business in engaging in business for so many reasons. Governments engage in business activities primarily to achieve a “double bottom-line” generating financial income while at the same time generating critical social and developmental mandates. By operating state-owned enterprises (SOEs) or engaging in commercial ventures, the government can secure non-tax revenue, to fund public services and infrastructure development.
State-owned enterprises (SOEs) are a major channel for states to exercise their role as economic actors in the society. The benefits of SOE ownership are economic, environmental, political and social. So too are the costs of any mismanagement or abuse. Today, SOEs account for 22 percent of the world’s largest companies and are often concentrated in sectors with strategic importance for the state and society, including for development. More and more, SOEs operate like similar private firms, increasingly active in international markets and accounting for a greater market share. The more pronounced presence of SOEs in the global marketplace has been marked by certain high-profile scandals and occasional evidence of a susceptibility of SOEs to corruption especially in countries where there is lack of rules of law. This raises questions about what might make SOEs susceptible to corruption and how policy makers can act to maximise SOE productivity by raising their integrity.
The first ten biggest state owned enterprises in the world ranked by total assets are: Federal National Mortgage Association (Fannie Mae) – $4,335,856,000,000 (USA); Federal Home Loan Mortgage Corporation (Freddie Mac) – $3,468,187,000,000 (USA); China National Petroleum Corporation – $607,519,976,579 (China); EDF – $434,808,681,930 (France); China Mobile Communications Corporation – $296,634,616,620 (China); Canada Mortgage and Housing Corporation – $256,788,031,368 (Canada); China Three Gorges Corporation – $196,540,424,410 (China); Baosteel Group Corporation – .$183,088,493,206 (China); Texas Treasury Safekeeping Trust Company – $165,866,364,989 (USA) and China National Offshore Oil Corporation – $158,085,981,738 (China). Most of these SOEs require a lot of capital that cannot be easily raised by individual business men.
The following are primary reasons why governments do business to generate revenue:
Financial and economic stability
- Revenue diversification: Profits from state-run enterprises provide a direct source of income, reducing the government’s sole reliance on taxation and royalty to fund the national budget. Some countries like China depend more on revenue from SOEs than on taxation to generate revenue for public governance to the point where SOEs are considered central to the nation’s economic success.
- Fiscal stress relief: SOEs can sometimes operate outside of the central state budget, allowing the government to manage debt and fiscal pressure more flexibly. Most SOEs do not depend on the state budget but generate profit and dividends for the states instead.
- Capturing natural resource wealth: In many countries, SOEs manage extractive sectors (like oil and gas and solid minerals) to ensure that a significant portion of resource wealth is captured directly by the state rather than exiting to foreign private entities. Botswana’s diamond industry is primarily managed by Debswana Diamond Company, a 50/50 joint venture between the Botswana government and De Beers. Debswana operates the majority of the nation’s mines, accounting for 98 percent of production while the government also operates the Okavango Diamond Company accounting for two percent (2%). Aramco, the world’s largest oil producer, is Saudi Arabia’s oil company and it is worth $1.7 trillion.
Market and industrial development
- Addressing natural monopolies: Governments often run businesses in sectors with high barriers to entry or “natural monopolies,” such as railways, water, and electricity. This ensures these essential services remain accessible and prevents private monopolies from overcharging the public. Some businesses like electricity and water are so essential for human existence that the government cannot allow capitalist private investors to be in charge. Candido Da Rocha (1860 – 1959) was a pioneering Nigerian businessman and philanthropist who famously supplied water to residents of Lagos and colonial officials in Lagos during the 1920s. He was known as Nigeria’s first millionaire and operated from his residence, the “Water House’ on Kakawa Street, which featured the state’s first borehole and fountain. Da Rocha made so much money from supplying a basic need of man that the government had to buy the business from him after Lord Lugard commissioned Lagos Water Corporation on July 1, 1915.
- Stimulating “infant” industries: Governments may invest in and operate businesses in emerging sectors that are too risky for private investors. This helps foster new industries that can eventually drive long-term economic growth and future tax revenue. The Western State (earlier Western Region) government invested in the Cocoa Board primarily to monetise agricultural prosperity for regional development; stabilise the incomes of local cocoa farmers and fund infrastructure.
During the 1950s and 60s, under the leadership of Obafemi Awolowo, cocoa was the backbone of the region’s economy, and the Marketing Board served as a vehicle to convert this agricultural wealth into structural, educational and economic growth.
- Attracting investment: Successful state-led projects can de-risk sectors, signaling to private and foreign investors that the market is viable for further capital infusion. Some private individuals will rather invest in governments’ businesses because of the financial strength of governments.
Security of life and properties of other citizens
- Strategy for safety: Companies like Defence Industries Corporation of Nigeria (DICON), which produced small arms and established by an Act of parliament in 1964, could only be established and operated by the government in a multi-ethnic and under-developed country like Nigeria.
- Real estate as a business: Large-scale real estate like city development, social housing and urban regeneration can only be engaged in by the government.
It is not true that the government has no business in business. Governments, either capitalist, welfarist or socialist, must engage in some businesses, especially those providing basic needs of man like food, housing, medicals, transportation and security to ensure welfare and security of the citizens and to generate revenue to develop infrastructure and provide public services.
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