Is private so efficient and public so bad?

The Impact of Privatisation
May 23, 1997

Since 1979 more than Pounds 60 billion of United Kingdom business assets have been transferred from the state to the private sector. The industrial landscape has been changed and the structure, conduct and performance of the former state companies have come under intense public scrutiny.

At the political level, the policy of privatisation has been an undoubted success, and now each of the main UK political parties accepts the principle of privatisation. Around the globe, too, the policy has been copied, particularly in eastern Europe, Latin America and Asia.

While the economic benefits of privatisation have been more hotly contested, the process of privatisation has given industrial economists a new lease of life and brought them more to the centre of the public policy stage.

Stephen Martin and David Parker add to the large and growing body of work on the relationship between ownership and performance with a detailed empirical study of 11 privatised UK companies, including British Airways, BT, British Gas and BAA.

All the companies studied were privatised before 1989 and were chosen particularly on the basis that there was sufficient data to undertake robust statistical analysis. Above all, Martin and Parker hope to avoid bias in favour of only short-term gains immediately before and after the act of privatisation.

The authors begin with an extensive analysis of earlier international and UK studies and provide a useful and highly readable review of the theoretical and conceptual issues involved. They conclude that while the various theories - agent-principal, public choice and those in the property rights literature - suggest a strong a priori case for privatisation, the empirical evidence is more mixed.

New evidence on whether and how privatisation has affected corporate performance is thoroughly and comprehensively presented to the point, at times, of being difficult to digest.

To overcome data problems many measures of performance are analysed including labour and total factor productivity, value-added and the rate of profit. In particular, a great deal of care is taken to disentangle the 'noise' of business cycle, technological progress and regulatory effects from the results and conclusions.

Unlike many of the earlier contributions to the debate, this new study examines not just productive efficiency but also effectiveness and equity issues. These include the impact privatisation has had on the distribution of business income, wage relativities and employment effects.

Inevitably, perhaps, the impact of privatisation on company performance varies enormously. It does seem, however, that privatisation has been associated with higher profitability and labour does seem to have lost in terms of income share.

The picture is less clear in respect of employment and wage relativities where initial job losses and falling relative wages gave way to a more stable medium-term state.

With Aziz Boussofiane, the authors also assess the technical efficiency gains using data envelopment analysis. While efficiency appears to have improved at BA, Associated British Ports and British Gas, there is no systematic evidence that public enterprises are less technically efficient than private firms.

There is also a particularly interesting review of how privatisations have affected the internal organisations of the companies involved. The authors emphasise that business objectives differ between the public and private sectors and that the different balance between economic (shareholders') and noneconomic (other stakeholders') goals needs to be taken into account when drawing conclusions about relative performance in the state and private sectors.

In particular, the authors show that privatisation was quickly followed by restructuring within firms and changes to their strategic direction, structures, processes and internal mind-sets, all of which were necessary to push through programmes of change, and which will, arguably, raise long-term performance.

Of course, businesses that were not privatised also underwent widescale organisational change and some evidence suggests that performance improvements matched those taking place in private industry. None the less, perhaps the real economic benefits of privatisation will come to be found in the way the removal of political influence clarified commercial objectives and changed the culture of the organisation and its willingness and ability to manage risk.

On balance, it seems that neither private nor public-sector production is "inherently or necessarily" more efficient and that under the right management, with clear central government objectives (and the freedoms to act commercially) state industries can raise their performance dramatically.

The quantity of the data and the care exercised over its interpretation makes this a difficult book to read. Yet it is an important analysis of the impact privatisation has had on the performance of major British companies and a useful addition for students of industrial economics and organisational behaviour.

Tim Walsh is director ofinternational affairs andbusiness strategy, Royal Mail International.

The Impact of Privatisation: Ownership and Corporate Performance in the UK

Author - Stephen Martin and David Parker
ISBN - 0 415 14233 4
Publisher - Routledge
Price - £45.00
Pages - 255

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