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Public Sector Management: Beyond the Hype - Page 3

THE SUCCESS OF PRIVATISATION

As was pointed out above, central to the managerial revolution was the promise that the privatisation of public services would result in an improvement in efficiency. Was this necessarily so and what evidence existed in the post-privatisation world to support that claim?
A privatisation programme based upon the assumption that ownership matters is unlikely to result in an improvement in efficiency. It is not whether the assets are owned publicly or privately that matters but whether there is competition in supply post-privatisation. Competitive forces rather than ownership establishes the conditions which might bring about improvements in efficiency. Thus one of the essential questions that must be confronted, is how effective are the disciplinary forces of the market? How powerful are the forces of competition? Competitive forces will result in a search for improvements in efficiency if:-

However, in the majority of cases there were few alternative sources of supply post privatisation and the spread of share ownership over a large number of shareholders meant that shareholder power had been diffused. This gave the management of the more recently privatised industries a great deal of discretion to pursue policies which served the interests of stakeholders other than shareholders.

A fundamental question, therefore, is whose interests are the post-privatisation public utilities serving? This is not necessarily an easy question to answer. Clearly the regulatory regimes that have been established seek to promote - the interests of customers as stakeholders but how effective are the regulators in doing this? How should we go about judging the performance of the various regulators? What are their performance indicators? The principal problem which faces every regulator is the availability of accurate information about the internal activities of the firms in the industry that they regulate. The nature of the game that is played between the regulator and the regulatee should not be under-estimated and yet we know very little about it in order to judge its effectiveness. The design of a suitable regulatory regime is a challenging exercise in public policy because the regulator needs to curb the monopolistic power of the industry whilst not destroying the incentives for firms in the industry to invest and to produce efficiently.

Therefore, have the newly privatised companies improved their efficiency? The picture is a mixed one - some have, some haven't. Many of the companies that were privatised, especially the early privatisations, were relatively efficient at the outset. A study by Dunsire et.al. found that, using total factor productivity as a measure of efficiency, only the efficiency of the National Freight Corporation was above the national trend. Other studies confirmed this - they could not find any significant improvement in productivity following privatisation. (4) British Airway's productivity growth just prior to privatisation was 8.6% p.a. Since privatisation it has been less than this.

Was privatisation a waste of time? Bishop, Kay, and Mayer (5) make a powerful case in favour of the potential benefits of privatisation, "even in the absence of competition it allows more powerful incentives (market-value related incentives, takeovers and bankruptcy) to be introduced. It separates public and private goods elements of supply and provides more information on which to base the regulation of public elements".

Post-privatisation organisations have become more transparent, but whilst incentives have become clearer they are not necessarily more binding. The incentives from bankruptcy and takeover are still relatively weak. Is it really possible to envisage a water company or a gas company being allowed to go bankrupt? One credible threat, however, is that if the management of the company were to under perform then they would be replaced. It is, therefore, in management's interests to produce acceptable performance - but acceptable to whom?

An interesting feature on the privatisation landscape is the threat coming from American based companies who seem to be continually interested in purchasing UK privatised public utilities. The US rail company Wisconsin Central Transportation was interested in acquiring British Rail's freight business. American power companies purchased two British regional electricity companies Seeboard and Sweb for £3 billion.

One reason for the interest taken by American companies in British utilities is the difference in the regulatory regime in the two countries. In America the regulator controls profits, whereas in the UK it is revenues through prices that are controlled. This gives US companies greater investment opportunities in the UK. The American companies are cash rich and want something to do with it. The purchase of UK privatised utilities is a favoured option.

Does it matter who owns the privatised utility? The earlier answer was no from an efficiency perspective but yes it can, especially if we are interested in balancing up stakeholders interests. If US management is purely interested in profitability then shareholders' interests will dominate at the expense of others - for example customers. The question that has to be asked, therefore, is whether or not the regulatory regime in the UK has sufficient resources and powers to confront this style of management?

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