Quasi-Public Corporations: What They Are and How They Work

What Is a Quasi-Public Corporation?

A quasi-public corporation is a company in the private sector that is supported by the government with a public mandate to provide a given service. Examples include telegraph and telephone companies, oil and gas, water, and electric light companies, and irrigation companies.

Quasi-public corporations may be established de novo, begin as government agencies that become privatized, or be the result of a large private company becoming partially nationalized. They are often also referred to as public service corporations.

How Quasi-Public Corporations Work

Like public-purpose corporations, such as public libraries and adult day centers, quasi-public corporations are created to benefit the public in some way. These private-operating companies are presented with a government-chartered mission and, in exchange for their services, usually receive some form of partial funding from the state.

Quasi-public corporations may comprise public companies of an industrial and commercial character, nationalized companies, and companies with majority public shareholding. Many consider quasi-public institutions to be political policy tools because they can, in some instances, operate with fewer restrictions and greater cost-effectiveness than regular government institutions.

Government Funding

For those public-private corporations that receive some type of government funding, such subsidies consist of regular fund transfers intended to compensate for persistent losses, euphemistically referred to as negative operating surpluses.

Losses can be incurred by charging prices that are lower than average costs of production as a matter of deliberate government economic and social policy; by convention, these subsidies are treated as subsidies on products.

Examples of a Quasi-Public Corporation

One example of a quasi-public purpose corporation is Sallie Mae Corp., which was founded to advance student loan development. Another example is Fannie Mae, otherwise known as the Federal National Mortgage Association (FNMA).

Fannie Mae is regarded as a quasi-public corporation because it operates as an independent corporation that's not treated as any part of the government, while at the same time operating under a congressional charter that aims to increase the availability and affordability of homeownership.

Special Considerations

It is not uncommon to see the shares of this type of corporation trade on major stock exchanges, giving individual investors the opportunity to gain exposure to the company and any profit it generates.

While shares of this type of corporation are sold publicly, creating value and profit for shareholders comes second to carrying out its public purpose. The operations of a quasi-public corporation must usually, in some way, contribute to the comfort, convenience, or welfare of the general public.

Quasi-public corporations are often mistakenly assumed by the public, and investors, to be branches of the government. This creates a perception of safety, or risk-free investment in their equity and debt, as highlighted in the run-up to the financial crisis of 2008.

Debt securities issued by Fannie Mae, and its counterpart Freddie Mac, said on their face that they were not government-guaranteed, though many investors treated them as if they were. Public outcry and the pressure from investors when these entities faced bankruptcy helped lead the U.S. government to bail them out. In effect, the public perception that these quasi-public entities were guaranteed by the government overrode the explicit terms of the securities themselves.