Public enterprise evaluation: a case study of the national housing corporation, Kenya

Abstract

The study aims to evaluate Kenya's National Housing Corporation (NHC), the public enterprise responsible for implementing the government's housing policy. The primary objective of the NHC is to finance and develop housing that is affordable by lower-income groups. An assessment is made of the extent to which this organization meets both the immediate housing Objectives set for it and the more general objectives of economic efficiency and equity. On the one hand, a comparative evaluation is conducted, with a view to assessing the NHC's productive efficiency relative to private developers. On the other hand, a direct evaluation is carried out in order to establish the Corporation's effectiveness in meeting its specified objectives. More specifically, effectiveness is measured mainly in terms of the number of dwellings produced relative to development plan targets; dwelling costs relative to household earnings, and the ability of the NHC financially to break even subject to transferring subsidies to beneficiaries. An eclectic analytic framework is employed informed by the traditional economic theory of the firm, and by managerial and behavioural models. Prominent in this regard are the principalagent and property rights theories. A number of hypotheses are tested. The first, based on the principal-agent model, is that the NHC's actual goals will diverge from the formal goals set for it. The second hypothesis is that the Corporation management exercises managerial discretion via expense preference. The third is that arising from the greater attenuation of property rights in public enterprises, the NHC is less productively efficient than private developers. Fourth, it is hypothesized that the housing prices and rents charged by the Corporation are allocatively inefficient. The final hypothesis is that there is neither vertical nor horizontal equity in the subsidies that underlie NHC financed housing. Taken together, our findings suggest that the Corporation is a viable organization that meets its main objectives. However, its actual housing programme has shifted away from lower-income housing and overall dwelling output has been lower than planned. With regard to productive efficiency, there seem to be no systematic evidence that the NHC is less cost efficient than private developers. Even so, some cases of substantial productive inefficiency are identified. An investigation of allocative efficiency shows that the rate of return on NHC dwellings is significantly lower than a benchmark return set by the Treasury, suggesting that unless the implied subsidies could be justified socially, NHC prices and rents are allocatively inefficient. Finally, an enquiry into equity indicates that the distribution of subsidies is regressive at higher income levels and that such subsidies are not tenure-neutral.