The Quasi-Government Sector

In most parts of the world, the financial system can be divided into two parts viz. the private sector and the government sector. However, in many parts of the world, there is a third sector called the quasi-government sector. This sector has the characteristics of both the government as well as the private sector. The details about the quasi-government sector, as well as how this sector operates has been mentioned in this article.

What is the Quasi-Government Sector?

The very nature of the quasi-government sector makes it difficult to define. People generally think of companies that are either private or public. Hence, the concept of a company that is part private, and the part public is difficult to conceive. It almost seems like an oxymoron.

When the term quasi-government sector is used, most investors are referring to private companies which have some relationship to the government. In many cases, the government may guarantee their debt but then may also control a large part of their operations. The difference between the private and public characteristics of such organizations can be quite opaque. This is the reason that many times, governments pass laws to state their relationship with a quasi-government entity explicitly.

Examples of Quasi-Government Entities

The concept of quasi-government entities is extremely popular in the United States. Some examples of such entities have been listed below:

• The Federal Reserve, which is the Central Bank of the United States of America, is a quasi-governmental agency. This means that the Fed is privately owned. However, a large part of its operations is controlled by the United States government. This might come as a surprise to many people who are not well versed with the unique organizational structure which is followed by the Federal Reserve

• Sallie Mae is another quasi-governmental agency that has been created in America. The purpose of Sallie Mae is to underwrite all the student loans and securitize them.

• Freddie Mac and Fannie Mae, which shot to fame during the Great Recession of 2008 crisis, are also quasi-governmental agencies. These agencies buy loans from originator banks. They then securitize them and sell them to investors in securities markets. Freddie Mac and Fannie Mae also underwrite many loans which they purchase

Benefits of Having Quasi-Government Entities

From the above-mentioned examples, it is clear, and the quasi-governmental agencies are used quite extensively in the United States. The United States government has been using quasi-governmental agencies in order to meet its strategic objectives. This is because this organization structure provides some obvious benefits. Some of these benefits have been listed below:

• Quasi-government organizations seem like an attractive alternative because they allow the government to achieve an objective without creating a bureaucracy. For instance, the United States government wants to promote home-ownership and higher education. However, it does not want to put a strain on the public resources by adding more government personnel, which will have to be sustained on the payrolls of the taxpayer indefinitely. The quasi-government structure allows governments to hire temp workers without actually bringing them on the payroll

• Quasi-government agencies combine the efficiency of the government as well as the private sector. Since these agencies are backed by the government, investors assume that they are lending money to the government. As a result, the interest rates offered to these agencies are quite low. This allows them to raise money at rock bottom prices. Also, since the organization is also a private company, it uses money more diligently. The wastage of resources in quasi-government agencies is much less. All resources, including human resources, are more productive in quasi-governmental agencies as compared to the public sector. The basic idea behind creating quasi-government entities is to use some of the sovereign power i.e., the faith of people in the financial power of the United States, to lower the interest rates of funds being given to a priority sector.

• In many cases, quasi-governmental agencies are created for the sole purpose of circumventing the laws created by the Federal government. These laws generally relate to the amount of compensation that can be drawn by a Federal employee. In many sectors such as finance, top employees have to be paid higher than what is permitted as per government laws. If the government doesn’t pay as much, then they will not be able to find skilled employees. This is the reason that quasi-governmental agencies are created to allow the government to pay more to a certain group of people without breaking any laws.

Shortcomings of Quasi-Government Agencies

It needs to be understood that along with all the above-mentioned benefits, and there are some shortcomings of the quasi-government agencies.

• The biggest shortcoming is the fact that the management of the entity has to answer to two sets of people. On the one hand, there are private shareholders who have a profit motive in mind. On the other hand, there is the government that only wants to serve the people. These stakeholders can sometimes have conflicting demands. As a result, often, there is a power battle which ensues and affects the performance of the entity in a negative way

• Critics also say that due to the easy availability of funds, quasi-government agencies quickly grow too big in size. As a result, they pose a systemic risk, which becomes difficult to manage.

The bottom line is that in many parts of the world, quasi-government entities are a reality. These entities pose to have their own characteristic features, advantages as well as disadvantages.

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