nationalisation, privatisation, and agency within government

7/28/2019 Nationalisation, Privatisation, And Agency Within Government

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11 SWP 23/92 NATIONALISATION, PRIVATISATION, AND AGENCYSTATUS WITHIN GOVERNMENT: TESTING FOR THEIMPORTANCE OF OWNERSHIP

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r- DAVID PARKERFinance, Accounting and Economics GroupCraufield School of ManagementCranfield Institute of TechnologyCranfieldBedford MK43 OALUnited Kingdom

(Tel: 0234-751122)(Fax: 0234-751806)

Copyright: Parker 1992


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INTRODUCTION

The word privatisation was not commonly used until the early 1980s. Withina decade, however, not only was it an accepted part of the language in mostWestern countries, more surprisingly it featured in the headlines of newspapersinWarsaw, Prague, Budapest and even Moscow. The policy of privatisation isnow a worldwide phenomenon affecting both the traditional capitalist count riesand the former communist bloc alike. The programmes introduced bygovernments differ in detail and intensity; nevertheless they are all driven by abelief that by transferring assets from public ownership to private ownershipefficiency will improve. The policy of privatisation is the product of a growingdisillusionment with state production during the post-war period.

In Britain, where a large privatisation programme was pursued in the 198Os,disillusionment took the shape of growing cr iticism of the nationalised industries.These giant industrial organisations had been created mainly by the 1945-51Attlee Governments but had proved difficult to manage effectively during the1960s and 1970s. However, once selling state enterprises appeared to winwide public support, attention also turned to the civil serv ice and difficult toprivatise welfare serv ices, notably education and health. In April 1988 theConservative Government introduced its Next Steps initiative intendedeventually to reduce the size of the central bureaucracy from 550,000 to lessthan 100,000 (HMSO, 1988). This is to be achieved by transferring personnelto quasi-governmental agencies which will run former activit ies on morecommercial lines and perhaps with new senior management brought-in from theprivate sector. The same Government also tackled what it cons idered to be thedisincentive effect of red tape in education and health by prov iding independentbudgets for schools and contract ing for health care between fund-holding GPsand self-governing hospitals. Just as head teachers could now be budget

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holders freed from total dependence on local authority education departments,so GPs could operate their own finances buying best care for their patients.The Next Steps initiative, along with the sale of state industries and reforms ineducation and health, were intended to result in a more eff icient use of scarceresources.

Unfortunately, however, assessing the value of privatisation and agencyinitiatives is hampered by a lack of empirical study of public versus privateefficiency. Where studies have been undertaken their usefulness is oftenrestricted by the problem of making like-with-like comparisons. State activitiesare often monopolies or much larger in scale than their private counterparts.Hence there are very few industries where direct comparison can be made.Moreover, surveys of the studies which have been undertaken have reportedmixed results (eg. De Alessi, 1980; Borcherding, Pommerehne and Schneider,1982; Millward and Parker, 1983). In particular, in addition to ownership,product market competition and the degree of continued state regulation ofenterprises are identified as significant factors determining managerial behaviour.

Turning specifically to the UK, there have been very few comparative studies,largely because nationalisation created monopolies. Pryke (197 1, 198 1) argues,in one such comparison of the private and nationalised sectors, that stateindustry outperformed private industry in the 1950s and 1960s in terms of thegrowth in labour and total factor productivity but performed much less well in the197Os, when performance was third rate, though with some evidence here andthere of first class standards (Pryke, 1981, p.257). However, recent data fromthe Treasury (Table 1) suggests that the nationalised industries improved theirperformance dramatically in the mid-1980s and may have again performed betterthan the economy in general in terms of labour productivity growth. It isdifficult to see what general conclusion can be drawn from this record. A more

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recent study of the early effects of the 1980s privatisations, by Bis hop and Kay(19881, is equally enigmatic. While government ministers, the popular press andmany economists have praised the success o f the privatisation progr amme inraising efficiency, Bishop and Kay conclude:

The overall picture to emerge..... is one of substantial change. Outputand profits have grown, margins have increased, employment hasdeclined. But the relationship of these c hanges to the fact of privatizationis not immediately apparent f rom the data. The privatized industries havetended to be faster growing and more profitable, but it seems that thecausation runs fr om growth and profitabilit y to privatization, rather thanthe other way round. (pp.40-41)

(Table 1 around here.)

There is, therefore, a clear need for more empirical study of the effects ofprivatisation and, equally, the results of related reforms which have createdquasi -i ndependent agencies to take over tradit ional state activities.

The remainder of this chapter is concerned, firstly, with assessing the a prioriarguments for privatisation and then, secondly, with reporting the main results ofa recent research programme into ownership and performance. This researchmeasured the extent to which performance changed in a number of organisationsin the UK which crossed between the public and private sectors or underwent astatus change within government. In the main only organisations whichexperienced relevant ownership changes before 1982 were included s o that thelonger-term effects of the change could be assessed (the exception is BritishAirways which was included for reasons explained later). This meant that whilemost of the privatisations of the 1980s could not be included, the research

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avoided the criticism that it is still too soon to assess the full effects of recentprivatisations. Also, although these ownership changes are not included, theresults are still relevant to an assessment of the likely effects of the privatisation,Next Steps and other related government programmes both in the UK andelsewhere.

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THE CASE FOR PRIVATISATION

The case for privatisation cannot be safely made simply on the basis of theexisting knowledge of public versus private efficiency provided by empiricalstudies. Instead, the main intellectual force has come from a priori or deductivereasoning centred on public choice and property rights theories. Thesetheories have been popularis ed through the publications of free market pressuregroups such as the Institute of Economic Affairs and the Adam Smith Institute inthe UK and the Pacific Research Institute and the Cato Institute in the USA.Hence they are now well known and the briefest of summaries will suffice here.

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Public choice theory is concerned with the nature of decision taking withingover nment. Rejecting the Weberian notion of disinterested officials act ioningdemocratic decisions, public choice theorists (eg. Niskanen, 197 1; Buchanan,1978; Mitchell, 1988) argue that gover nment officials are just as inclined topursue their own ends as other individuals. Drawing from the neoclassicalmodel of the utility maximisi ng economic man, they conclude that governmentpolicy is likely to be shaped to maximise the utility of public sector employeesrather than the public at large. Moreover, they further argue that polit icians,whose role is to lay down policy and monitor the performance of state officials,are also likely to pursue their own utility in terms of maximising the chances ofre-election. In this envi ronment the power of pressure groups, such as publicsector trade unions, is increased to the point where public services are run in theinterests of the employees and other special interests rather than the public.The result is an over-bl oated or inefficient public sector.

Property rights theory complements public choice economics. In this theory thesource of ineffi ciency in state organisations lies in the attenuation of propertyrights. In the archetypal capitalist firm the ent repreneur has a direct interest in

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associated with less a/locative efficiency.

State enterprises tend to be protected from competition. For example, under theCoal Industry Nationalisation Act British Coal has rights to mine coal in GreatBritain to the exclusion (save as in this Act provided) of any other person andimports of coal were restricted. Similarly, before deregul ation of local busservices by the 1985 Tr ansport Act, public sector bus services in Britain facedonly limited competition from private bus operations. It has been a leading tenetof economic theory since Adam Sm ith that competition is generally superior to.monopoly . Under competition prices are related more closely to marginal supplycosts leading to allocative efficiency and survival in the competitive marketrequires production costs to be minimised.

From this brief discussion it should be clear that there ar e two broad forcesidentified in economic theory which lead to high allocative and productiveefficiency - the capital market and the product market. In the remainder of thischapter we are primarily concerned with produc tive efficiency. In Figure 1 thesetwo forces are represented by the capital market on the horizontal axis and theproduct market on the vertical axis. Point A represents the position of a firmwhich is directly controlled by a government department. It is politicallycontrolled and there are no tr adeable shares, hence we would expect from thepublic choice and proper ty rights theories that efficiency will be low. Point Brepresents an activity undertaken by a government agency which has some, iflimited, autonomy from the polit ical process. Examples include the trading fundsset up with their own finances under the 1973 Trading Fund Act and the morerecent agencies established under the Next Steps initiative. Public corporations(nationalised industries) can be placed at point C. They have more autonomythan quasi-gover nmental agencies and were designed i n the immediate post-warperiod to act at arms length from government. Their chairman may be drawn

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from the private sector, commercial style accounts are published and employeesare not civil servants. At the same time, however, government ministersintervene in long-term strategy and sometimes in day-to-day managementdecisions. Also, government acts as ultimate guarantor of the industrysfinances.

(Figure 1 around here)

Points D, E and F correspond to forms of ownership in the private sector. PointD includes those private sector f irms which are close to the public sector becauseof state funding or a reliance on state contracts. This might diminish incentivesto be efficient. Point E is the joint stock company; while point F representsprivate ownership where property rights are least attenuated - notably the owner-managed firm.

Turning to the vertical axis, movements upwards correspond to a shift awayfrom monopoly towards competition and hence greater product market pressureto be efficient. In summary, therefore, Figure 1 provides a mapping of theexpected relationship between ownership and performance, drawn from thetheories outlined earlier, and competition and performance. Although forconvenience discrete points on the horizontal axis have been identified A to F,both ownership and the product market are best viewed as continuousdimensions. The schema implies the following:

n changes in ownership involving movements away from polit icalcontrol towards private ownership, but with no change incompetit ion, will be associated with improved efficiency due to achange in the capital market;


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n increased competition in the absence of a change in ownership willbe associated with improved efficiency due to a change in theproduct market;

n changes in ownership involving a movement away f rom privateownership towards public ownership will be associated withreduced efficiency due to a change in the capital market;

n less competition, even where there is no change in ownership, willlead to a reduction in efficient ? .

In Figure 1 these movements are illustrated as X to Y, X to Z, Y to X and Z to Xrespectively. The largest efficiency gains are likely to be associated withmovements from X to W, that is towards private ownershi p and morecompetition; while a movement from W to X, involving political control and lesscompetition, is likely to lead to a significant deteriorat ion in efficiency.Movements either way bet ween posit ions Z and Y imply an ambiguous resultbecause the changes in the product and capital market constraints on managerialbehaviour conflict.

From this discussion the following central hypothesis can be derived: changes /i,ownership a way from political control and to wards private ownership, especiallywhen also associated with increased compe Won, will lead to appreciableimprovements in efficient 3 . It is, of course, precisely this view whichunderpinned the policy of privatisation in the UK in the 1980s and whichcurrently drives the policy in eastern Europe. The emphasis given to promotingcompetition also has implications for current discussion of the role of regulationof privati sed public utilities (Parker, 1989) . The property rights and publicchoice theories suggest that privatisation of monopolies will lead to some

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efficiency gains (though these gains may mean higher profits rather than lowerprices), but the largest efficiency gains will occur where privatisation isassociated with more competit ion. Where natural monopoly prevents efficientcompetit ion, the regulatory structure should create managerial incentives similarto those which exist under competition.

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THE ORGANISATIONS STUDIED AND THE PERFORMANCE MEASURES USED

To test the central hypothesis that ownership affects economic performance, tenorganisations were selected covering a number of possible moves between thepublic and private sector (nationalisation and privatisation) and within the publicsector (from government department to trading fund or public corporationstatus). Two of the organisations underwent two ownership changes in theperiod studied, hence twelve relevant status changes were studied. The tenorganisations, their status changes with the relevant dates, and the predictedeffect on performance are summarised in Table 2.

(Table 2 around here)

Four nationalisation/privatisation cases were included - British Aerospace, RollsRoyce, British Airways and the National Freight Corporation (NFC). BritishAerospace was created on the nationalisation of the UKs two largest aerospacecompanies - the British Aircraft Corporation, Hawker Siddeley (Aviation andDynamics) - and the smaller Scottish Aviation in 1977. Four years later thecorporation was privatisedP Rolls Royce was bought by the state in February1971 following a financial crash associated with major cost over-runs in thedevelopment of the RB211 engine. The company was privatised in 1987,though this event came too late to be included in the study. The decision toprivatise British Airways was made in 1980 but had to be postoned until 1987,mainly because of legal disputes in the USA relating to the collapse of LakeAirways (British Airways along with Pan Am and TWA was accused of anti-competitive practices), and later because of the need to renegotiate the BermudaII agreement which regulates traff ic on the vital Atlantic routes. However,because the management were aware that privatisation was imminent, we might

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expect to find a large growth in efficiency between 1980 and 1987. Lastly, theNational Freight Corporation was established as a state holding company for thenationalised freight and related undertakings in 1969. It was privatised inFebruary 1982 in a celebrated worker and management buy-out.

The movements within the public sector which were studied included the RoyalMint, the HMSO (the governments stationery office), the Royal OrdnanceFactories, London Transport and the Post Office. The Royal Ordnance factories,the Royal Mint and the HMSO had for a long-time been run within governmentdepartments, but with a view to making them operate more commercially weregiven trading fund status in 1974, 1975 and 1980 respectively. Under tradingfund status, management are still accountable to the Minister and the employeesremain civil servants. The organisation, however, has its own accounts and isfinanced by trading receipts instead of parliamentary votes. This provides for agreater degree of financial autonomy and managerial independence than existswhen activities are directly run by government departments.

London Transport, which manages the capitals bus and underground services,was one of Britains first public corporations when established in 1933. In thepost-war years it had a chequered history of ownership though it alwaysremained a public corporation. From 1963 it was responsible to centralgovernment but in 1970 it became accountable to the Greater London Councilwhich had been established five years earlier. This change resulted in fourteenyears of periodic and extensive polit ical intervention in the management ofLondon Transport, notably in relation to pricing policy. Following the decision toabolish the GLC, the corporation once again became accountable to centralgovernment in 1984 and its management were expected to operate morecommercially. Given the extent of political intervention in London Transportduring the GLC years, we would expect performance to have deteriorated after

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1970 and improved again after 1984. Lastly, the Post Off ice postal andtelecommunications businesses were separately studied. The Post Office movedfrom being a government department to public corporation status in 1969, againwith a view to raising efficiency.

Performance changes were measured using three sets of measures. The reasonfor using different measures was to check for measurement bias, ie thepossibility that performance might have improved using one measure but notusing another (something found to be true for many of the organisations studied).

The three sets of performance measures were:

n Labour and total factor productivity. Four year averages wereused for before and after the dates of the status change to capturelead and lag effects. There is always the possibility thatperformance might have improved ahead of the date of the statuschange or that there might have been a delay caused byreorganisation costs before performance responded. Longerperiods were not used because these might have reflectedperformance changes unrelated to the ownership change. Tocontrol for the effects on performance caused by general changesin the macro-economy, notably the business cycle, changes in theorganisations productivity were compared with changes inproductivity in the same periods for the whole of the UK economy,public corporations and, in the case of manufacturingorganisations, UK manufacturing industry.

Labour productivity was measured by the relationship between aweighted index of physical quantit ies of output and the volume of

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labour input. In the absence of reliable information on averagehours worked, the average number of employees was used as thelabour input. Where no adequate physical output measure wasavailable, this was approximated by deflating the value of outputby price deflators, including an own industry deflator. Using morethan one price deflator provided a test of the sensitivity of theresults to the precise deflator used.

Total factor productivity was defined as:

TFP = Weighted index of physical quantit ies of output

Total expenditure on inputs/Weighted index of input prices

Again, where there was an absence of quantity data physicaloutput was approximated by applying relevant price deflators tovalue of output figures.

n Employment functions. Various employment functions were triedthough the Ball and St Cyr (1966) function usually gave the best fitand had the added advantage of simplicity. Employment functionsrelate the amount of employment to a series of independentvariables and in the Ball and St Cyr function the relationship isexpressed in general form as:

N = f(q,tJQ 1

where N is employment, q is output, t is a time trendand Nt-1 is a lagged dependent variable from which

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the speed of adjustment of employment to itsoptimal level can be calculated. The equation isexpressed in natural logarithms.

By introducing a binary (dummy) variable for the ownershipchange, it was possible to test whether ownership had astatistically significant effect on the employ ment relationship. Thebinary variable was applied in both shift and slope forms so thatthe relat ionship tested was:

Ni = a+biVi+cXVi+D+mi

where Vi is a vector of variables, notably output, the timetrend and the lagged dependent variable, X is a slope shiftdummy variable for status change applied to V, D is anintercept shift dummy, and mi is the usual stochastic errorterm.

Where employment efficiency rose following the status change the sign on thedummy variable will be negative suggesting less empl oyment to output; the signwill be positive if employ ment efficiency fell. The use of an employmentfunction permitted an assessment of the longer-term effects of organisationalstatus c hanges on the relationship between employment and output thanprovided by the labour productivity calculations. It also permitted theintroducti on of other factors which might have impacted on the relationship.

8 Financial Ratios. A series of standard financial ratios werecalculated for each organisation. Appropriate adjustments weremade to the reported accounting figures to create a consistentseries over time where there had been changes in accounting

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practice. The following ratios were calculated:

rate of return before interest and tax on net assets(profitabilityI

debts to turnover and stock to turnover (use of workingcapital);

sales to net fixed assets (use of capital stock);

labours share in expenditure and value added per employee(use of labour).

Profitability is usually taken to be the key financial ratio to whichthe others contribute. However, using profitability alone isunsatisfactory when considering organisations which spent someor all of their time in the public sector. In the public sector goalsother than profitability are often considered as, or more, important.Performance measured simply in terms of the rate of return on netassets could, therefore, simply reflect changes in objectives.

The ratios were calculated using four year averages for before andafter the status change and were tested using a simple covariancemodel which took the form:

Vit = a+bti+bXti+D+mi

where yt is a vector of financial ratios and onceagain t is a time trend, X is a binary variable in slope

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form and D in shift form to capture the effect of theownership change. Other factors affect ing financialperformance are reflected in the time trend, t. 1

Returning to the organisations studied, only three - the HMSO, British Aerospace(nationalisation) and London Transport (post-l 984) had appreciable changes intheir competitive envi ronment at around the time of the status change whichmight have impacted on performance. In 1982 the HMSO lost its monopoly ofstationery and other supplies to government departments. The nationalisati on ofthree airfr ame manufacturers to create British Aerospace reduced competition;while in the case of London Transport, from 1984 an increasing number ofLondon bus routes were subjected to competitive tender.

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RESULTS

Space precludes the inclusion of all of the statist ical results, but the main onesare reported in Tables 3, 4 and 5 (for fuller details see Parker and Hartley 1991 aand 1991 b and Hartley, Parker and Martin, 1991). Table 3 provides a selectionof results from the employment function tests; Table 4 includes the figures onlabour and total factor productivity adjusted for changes in productivity in thewhole economy, public corporations and the manufacturing sector; while Table 5is a summary of the results of the significance tests on the financial ratios. In allcases dates refer to accounting year ends. For example, for the HMSO 1977-80refers to the accounting years year ending 31 March 1977 to 31 March 1980.

(Tables 3, 4 and 5 around here.)

Inevitably, using a number of financial ratios meant that not all of them pointed inthe same direction. To provide a guide, albeit crude, to the overall impact, eachof the financial ratios was weighted equally to derive the net total column. Animprovement in any ratio was given a value of one; where it deteriorated a valueof -1. A net total greater than zero means that more financial ratios improvedrather than deteriorated; and vice versa for a negative total. Changes in thestocks and debtors ratios need to be treated with special care as the direction ofchange associated with an improvement in performance is not certain. Lowerstocks and debtors ratios may not always be desirable. Too few stocks mightmean an inabilit y to meet new orders. Fewer debtors could result f rom pesteringcustomers to pay to the point where future sales are lost. An alternative view isto interprete any change in these ratios, in whatever direction, as evidence ofimproved performance. The final column in Table 4 adopts this approach. It isimportant to stress that either net total is merely a crude illustrative guide

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implying an equal weighting of the ratios and, therefore, the figures must beinterpreted with care. It can be argued that profitability is the key ratio, though asalready explained there is a problem in using profitability alone when measuringchanges in performance for organisations which spent at least some of their timein the public sector. Nevertheless, it is interesting to note that in five of the casesprofitability rose following the status change (though for Rolls Royce contrary toexpectation) and for none of the organisations did it decline.

In the cases of British Airways and the National Freight Corporation theperformance measures showed evidence of improvement. The anticipation ofprivatisation and actual privatisation respectively seem to have had the desiredeffect. The British Airways results are unambiguous. In terms of theemployment equation for the NFC, the inclusion of a slope dummy on outputindicates that before privatisation the output coefficient was insignificant butbecame significant following privatisation. Along with the expected negative andsignificant shift dummy, this implies that privatisation was associated with alarge increase in employment efficiency. In Table 4, three time periods arereported for the NFC with the period 1980 to 1983 reflecting the anticipationeffect of impending privatisation in 1980/81 and the companys first nineteenmonths in the private sector. The financial ratio results for the NFC are alsosupportive of the view that privatisation improved efficiency if it is accepted thatany changes in the stocks and debtors ratios suggest a performance change.

Turning to British Aerospace, the Ball and St Cyr employment function provided apoor fit and instead a function based on the Treasury employment function isreported (for more on this see Parker and Hartley, 1991 a, p.413). The shiftdummies proved to be positive as expected for nationalisation but contrary toexpectation for privatisation. However, the interaction terms on output suggestan improvement in employment efficiency, especially after privatisation in 198 1.

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In other words, the coefficient on output was somewhat higher during the periodof nationalisation implying a greater increase in employment was needed toproduce any given increase in output. This result is also born out by the figuresfor labour and to a lesser extent total factor productivity in Table 4. Labourproductivity growth was worse during the four years of nationalisation than inthe earlier or following periods of private ownership. The total factorproductivity results are more mixed, but the slight improvement in relation to theperformance of public corporations and UK manufacturing during the period ofnationalisation is a feature of the very poor productivity record of publiccorporations and manufacturing in these years. Similarly, the sharp recovery inUK manufacturing productivity in the early 1980s accounts for the deteriorationin relative total factor productivity performance after 1981. The financial ratioresults, however, do not confirm that nationalisation lowered performance and anassessment of the effects of privatisation depends upon the interpretationplaced on the deterioration in the stocks ratio.

Owing to lack of reliable data, for the Royal Mint financial ratios could not becalculated. But in terms of labour and total factor productivity growth theMints transfer from government department control to trading fund status seemsto have produced the anticipated efficiency gains. A Peel and Walker (1978)formulation of the employment function, which includes real wages as anindependent variable, proved more satisfactory than the Ball and St Cyr equation,though there was evidence of multicollinearity between output and the laggeddependent variable so the latter was omitted. The results suggest that themovement to trading fund status led to an improvement in efficiency as reflectedin the negative sign on the shift dummy, though this was partially offset by anincrease in the coefficient on output, implying a one-off efficiency gain at thetime of the status change.

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In the case of the Royal Ordnance Factories, contrary to expectation labourproductivity growth seems to have declined following the granting of tradingfund status and, with the exception of the comparison with trends in UKmanufacturing, total productivity growth also appears to have deteriorated.Again because the mid-to late 1970s was a period of very poor growth inmanufacturing total factor productivity in the UK, this may explain why theperformance of the Royal Ordnance Factories looks more respectable whencontrasted with this indice. There was also no sign of the expectedimprovement in efficiency as measured by the employment function results,where the coefficient of the shift dummy is positive rather than negative. Onlyusing the financial ratios could a performance improvement be identified (Table5).

Turning to the HMSO, immediately after becoming a trading fund theperformance in terms of comparative labour and total factor productiv ity seemsto have worsened. Tak ing the period after 1982, however, when the HMSOfaced competit ion for government contracts, labour productivity seems to haverecovered though the performance in terms of total factor productivity remaineddisappointing. With regard to the financial ratios, there was either no evidentchange in performance or a slightly improved performance depending on theinterpretation placed on the deterioration in the debtors ratio. The employmentfunction result reported takes 1982 as the date of the status change and theresult suggests improved performance.

The results relating to the public corporat ions were also mixed. Thenationalisation of British Aerospace has already been discussed. The transfer ofthe postal and telecommunications businesses from government departmentcontrol to a public corporat ion in 1969 led to improvements in labour productivityand perhaps also to some improvement in terms of the financial ratios (though

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once again, for telecommunications this depends on the interpretation placed onthe higher debtors ratio), but the results using the other measures were moreconfused. For telecommunications, the Ball and St Cyr employment functionprovided a poor fit , therefore the lagged dependent variable was omitted, inwhich case longer-term employment efficiency did seem to improve after theintroduction of public corporation status (but see Parker and Hartley, 1991a,p.413 for reservations). For the postal service, the status change dummyvariable in the employment function was statist ically insignificant at the lOohlevel or better.

At first blush perhaps the most surprising results were those for Rolls Royce.Instead of performance deteriorating as expected following the state takeover, itactually improved irrespective of which measure is used. It is interesting tonote, however, that labour productivity, in particular, actually fell in the mid-1970s. Between 1975 and 1978, for instance, the decline was between 1.4O/6and 3.7% per annum depending on the precise measure used (Parker and Hartley,1991 a, p.410). This may mean that the 1971 financial crash acted as a short-term stimulus to reorganise and cut waste, but that within a few years stateownership was having the expected deleterious effect on performance.

Lastly, London Transport remained a public corporation throughout the periodstudied but was subjected to more political intervention during its years underGLC control between 1970 and 1984. The expectation was that performancewould have deteriorated after 1970 and improved from 1984. Our studysuggests that the establishment of GLC control did not lead to an immediateperformance deterioration except in terms of total factor productivity. However,the transfer from GLC control in 1984 CM lead to the expected efficiencyimprovements. This result may be explained by the fact that politicalintervention in London Transport by the GLC intensif ied in the late 1970s and

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CONCLUSIONS

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The research reported in this chapter was concerned with test ing a centralhypothesis derived from the public choice and property rights literatures thatchanges in ownership status away from political control towards privateownership, especially when also associated with increased product marketcompetition, lead to improved performance. This was tested by studying tenorganisations which underwent twelve relevant status changes either within thepublic sector or involving movements between the public and private sectors.

The results were mixed and often varied depending on the precise performancemeasure used. Table 6 provides an overall summary of the results with theorganisations listed according to the extent to which the results supported thecentral hypothesis. The following are the main conclusions6

B Three cases of privatisation were studied involving British Airways,the NFC and British Aerospace. The results for British Airwaysand the NFC were strongly supportive of the central hypothesis,while those for British Aerospace were only slightly lesssupportive. In other words, privatisation seems to have led to theexpected performance improvement.

8 The results for those organisations which changed status withingovernment were more confused. In the case of the tradingfunds, the performance of the Royal Mint and, on the whole, theHMSO improved, but the results for the Royal Ordnance Factorieswere disappointing. The granting of public corporation status tothe Post Office in 1969 may have led to some improvement in

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labour productivity in both the postal and telecommunicationbusinesses, and perhaps a marginal improvement in terms of thefinancial ratios, but in terms of total factor productivity the resultwas unclear.

The results for the nationalisation cases were perhaps the mostsurprising. There was some evidence of a worsening in theperformance of British Aerospace after 1977 in terms of the use oflabour but not necessarily in terms of the other performancemeasures. In the case of Rolls Royce, initially state ownership ledto an improvement in performance, though performancedeteriorated later. The experience of London Transport followingthe abolition of the GLC and the the imposition of a clearercommercial objective, supports the view that political controlreduces efficiency.

In three cases, the HMSO, London Transport after 1984 and thenationalisation of British Aerospace there was a change inownership status and an apparent change in product marketcompetition. The HMSO and London Transport faced morecompetition, while the merger of three aerospace companies withinthe UK to form British Aerospace reduced domestic competition.According to the schema in Figure 1, the coupling of a change inownership with a change in the competitive environment shouldlead to significant changes in performance and this was broadlyconfirmed in two of the cases. The HMSOs performanceimproved more noticeably after 1982 when it lost its monopoly ofpublic sector supplies and London Transport registered a clearimprovement in performance after 1984. The British Aerospace

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results were less obvious, but there was no overwhelmingevidence of a deterioration in performance. This might, however,be explained by the fact that the corporation worked in an industryheavily dependent on state aid and government contracts so thateven before 1977 there was only limited competition between theconstituent companies of British Aerospace.

It is always dangerous to draw firm conclusions from what was clearly a smallsample. However, the results do not contradict the view that privatisationimproves performance and they provide some support for the argument thatpolit ical intervention in an organisations operations damages eff iciency. Theyseem to bear out Stephen Littlechilds warning some years ago in relation toorganisations which retain some government ownership, that .... . as long asultimate control lies with government, one cannot realistically hope to avoid allthe problems.... (Littlechild, 1981, p. 14). The introduction of trading fund orpublic corporation status within government had a less reliable effect onperformance than outright privatisation in the cases studied.

The scheme in Figure 1 performed well. Longer movements along the horizontalaxis (public to private ownership) did seem to be associated with more noticeableperformance changes. Also, the independent effect of product marketcompetit ion on efficiency seems to have been born out. This conclusion hasobvious implications for programmes which introduce agency status withingovernment, such as the Next Steps initiative, as well as for the on-goingdebate about the merits of public and private ownership, especially where thereis continuing state regulation.

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FOOTNOTES

1. The research was funded by the ESRC (Project number E 0925006) aspart of its Management in Government Initiative. I would like toacknowledge the contribution of my co-researchers, Professors KeithHartley and Andrew Dunsire, and the statistical assistance provided byBob Lavers and Stephen Martin. As far as the contents of this chapterare concerned, the usual disclaimer applies.

2. This, of course, may not be true where there are appreciable scale orscope economies. However, for the purposes of the remainder of thischapter this need not detain us.

3. Figure 1 and the reasoning on which it is based also implies thatmovements with/i, the private sector (eg D to F or F to D) will beassociated with changes in efficiency. However, this chapter isconcerned only with agency status within government and movementsacross the public-private boundary.

4. Although the government retained 48.4% of the shares until May 1985,1981 can be taken as the date of privatisation because from that date thegovernment ceased to intervene in the affairs of the company.

5. Calculating profitability before interest charges removes the effect ofdifferent types of financing. In particular, public sector activities have noequity, hence privatisation, by substituting equity for loan stock, reducesthe interest charge and increases post-interest profitability. Taking post-interest figures would introduce a bias in favour of the profitability results

28


29/49

after privatisation or before nationalisation.

6. In interpreting the results it would be useful to know more about thehistory of the organisations and their internal management with a view toexplaining why it is in some cases performance changed as expected butin other cases it did not. This might permit answers to an importantquestion. What are the internal organisational changes that lead toimproved efficiency? In other words, what are the critical factors forsuccess when ownership changes? Clearly, changing ownership cannotin itself change performance, something must change within theorganisation, but what is it?. This issue is addressed elsewhere (Parker,1992).

111

l

II)

I-

II

,*I

29


30/49

NOTE

.w

em,

*m

.Ra

m

Ll

-I(

+

II

2-m

II))

*-

*yB

*-

1. The ordinary least squares (OLS) method was adopted for the employment andfmancial ratio tests. In undertaking the statistical analysis, due attention was paid tothe possibility that the results were unreliable because of the existence ofmulticollinearity, heteroscedasticity and autocorrelation.

Multicollinearity leads to large standard errors of the regression coeff icients, thoughgiven that in this study, the primary objective was to identify differences inorganisational efficiency, collinearity was of limited importance provided it did notaffect the dummy variables. Its existence was detected by the use of a correlationmatrix, which picks up collinearity between pairs of variables (though it is less reliablein detecting collinearity between three or more variables where no two alone exhibithigh correlation). In only two cases reported below was there evidence of highcollinearity impacting on the results (see Parker and Hartley, 1991a) and to overcomeit, one of the variables was removed.

Heteroscedasticity makes the OLS estimators ineff icient, ie. they no longer haveminimum variance. This tends to be more of a problem, however, in cross-sectionalstudies rather than where time series data are used as in this study. Nevertheless, in aneffort to ensure that it was not a factor in the results, the residuals were plotted - nosignificant heteroscedasticity was discovered for the equations reported below. Bycontrast, autocorrelation among the disturbances is more common in time series data(though less so in annual data as used here). If it exists, once again the OLSestimators are no longer efficient so that the tests of significance are less powerful. Astandard method of detecting autocorrelation is the Durbin-Watson h statistic, howeverthis cannot be used for autoregressive models. Thus it could be used for the financialratio tests but not in the employment function study. The Durbin h statistic has beendeveloped for use in autoregressive models but it is only asymptotically efficient and

30


31/49

therefore should not be used for small samples. There appeared to be no readilyaccepted test for autocorrelation for small sample autoregressive functions, so detectingof first-order autocorrelation was undertaken by plotting the residuals. Where therewas evidence of autocorrelation, a first-difference transformation was undertaken usingthe Cochrane-Orcutt iterative procedure.

31


32/49

s*

jtm

*

rll

rl

-I

r*

I

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XI

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.*l

REFERENCESAlchian, A.A., 1965, Some Economics of Property Rights, // ~O/i~kO, ~01.30, pp.81 6-829.Ball, R.J. and St Cyr, E.B.A., 1966, Short-run Employment Functions in British ManufacturingIndustry, Review of Economic Studies, ~01.33, pp.1 79-207.Bishop, M. and Kay, J., 1988, Does Privatization Work? Lessons fromthe UK, Centrefor Business St rategy, London Business School, London.Borcherding, T., Pommerehne, W. and Schneider, F., 1982, Compari ng the Efficiency of Privateand Public Production: the evidence from five countries, Zeitschrift furNationalokonomie, ~01.42, supplement 2.Buchanan, J.M., et.al., 1978, The Economics of Polit ics, Institute of Economic AffairsReadings, 18, London.De Alessi, L., 1980, The Economics of Property Rights: a Review of the Evidence, &sea&in Law and Economics, ~01.2, pp.1 -47.Furubotn, E.G. and Pejovich, S., 1974, Economics of Property Rights, Ballinger,Cambridge, Mass..Grossman, S.J. and Hart, O., 1980, Take-over Bids, the Free Rider Problem and the Theory ofCorporations, Bell Journal of Economics, vol.1 1, pp.42-64.Hartley, K., Parker, D. and Martin, S., 1991, Organisational Status, Ownership andProductivity, Fiscal Studies, vol.1 2, no.2, May, pp.46-60.HMSO, 1988, civil Service Management Reform: the Next steps, Cmnd. 524,London.Lawriwsky, M.L., 1984, Corporate Structure and Performance: the Role of Owners,Managers and Markets, Croom Helm, London.Millward, R. and Parker, D., 1983, Public and Private Enterprise: Comparati ve Behaviour andRelative Efficiency, in R. Millward, D,Parker, L. Rosenthal, M.T. Sumner and N. Topham,Public Sector Economics, Longman, London.Mitchell, W.C., 1988, Government as /t k, Hobart Paper 109, Institute of Economic Affairs,London.Niskanen, W.A., 1971, Bureaucracy and Representat ive Government, Aldine-Atherton,New York.Parker, D., 1989, Public Control of Natural Monopoly in the UK: Is Regulati on the Answer?, inM. Campbell, M. Hardy and N. Healey (eds.), COntrOVerSy in Appli ed Economics,Harvester/Wheatsheaf, London.Parker, D. and Hartley, I


33/49

Pryke, R., 1971, Pub/k Enterprise in Practice, MacGibbon and Kee, London.Pryke, R., 1981, The Nationalised industries, Martin Robertson, Oxford.


34/49

FIGURE 1 MAPPING FOR EFFICIENCY IMPROVEMENTS

A Competition

c.-G>r05-

Monopoly

PublicSector

PrivateSector

B C D E FCapital MarketEfficiency Gain


35/49

TABLE 1: PERFORMANCE OF NATIONALISED INDUSTRIES

Labour Productivity(annual % change)

1979/80 0.1 0.7 0.9198018 1 -0.5 -3.8 -5.31981182 6.5 3.5 6.91982183 2.4 4.0 6.41983184 7.2 4.0 8.31984185 6.0 2.9 4.81985186 9.6 1.1 2.41986187 6.2 3.6 4.8

Nationalised WholeIndustries Economy Manufacturing

Source: Treasury, Economic Progress Report, No 193, December1987, p5.


36/49

TABLE 2: ORGANISATIONAL STATUS CHANGES

Type of change Organisation Date Prediction fromcentral hypothesisof change inPM-=Govcmmcnt departmentto trading fund .Government dqmmcntto public corporation

Public coqmationto (local) govcmmcntdeprwn=pLocalgolmnmcntdepartment topubliccorpomim .change ofowncrship:(i) Public limitalcompany to publicownership(b) Public aqkationto public limitedcompllll)r(c)Alakipaonc-public~onto public limitedCompgll)r

Royal OrdnanceFactoriesRoyal MintHMSOPost officePOStalPost officeTCltcommlllli-CNiOllSLondonTransport

LondonTransportRolls-RoyceBritishAaospaceBlitiSllNational FreightBritish Airways

July 1974 ImprovcmcntApril 1975 ImprovcIncntApril 1980 ImprovuncntApril 1969 ImprovementApril 1969 ImprovcmmtJan 1970 DCtCIiOratiOIl

June 1984 Improvcmcnt

Fcb 1971April 1977Feb 1981Fcb 1982MO-87

DctuiorationDeteriorationImprovementImprovementImprovcnlmt


37/49

TABLE 3 THE EMPLOYMENT FUNCTI ON RESULTS

a log Q h Nt-1 t Dl D2 Xl x2 R2HMSO

Royal Mint

Royal OrdnanceFactoriesPO Postal

PO Telecom

London Transport

Rolls Royce

British Aerospace

National Freight

British Airways

6.22*(2.29)3.44x(1.82)1.91#(1.82)7.04* *(3.50)

10.76**(46.03)-2.04(1.72)4.65(3.23)6.65

(3.36)21.48*(4.41)

0.91(0.71)

+0.20#(2.08)+0.21+(2.42)+0.18*(2.78)+O.lO*(2.15)+0.74* *(3.69)

-0.38**(4.33)+0.12*(2.20)+0.80*(2.79)-0.25(1.03)

+0.79**(5.38)

+0.36#(2.16)

+0.88**(8.20)+0.35*(1.97)

+1.38*(13.59)+0.51*+(4.20)

-0.26(1.22)+0.51* *(4.85)

-o.o2x(1.59)+O.Ol(0.24)

-0.02 * *(4.94)+O.Ol*(2.23)

-0.05 *(2.76)-0.01(0.87)

+O.Ol(0.03)-0.02*(2.50)-0.09 * *(4.12)-0.03 * *(3.95)

-0.19**(3.95)-3.25 *(2.32)

+O.ll**(3.61)-0.01(0.55)-0.12**(3.12)-0.01(0.50)-0.13**(4.32)

+4.73(2.16)-7.46* *(3.27)-0.07#(2.14)

-0.41+(2.17)

-0.04#(1.86)

+5.19* -0.66#(2.36) (2.15)

+1.46**(3.24)

0.99

+0.43* 0.69(2.30)0.87

0.72

0.78

0.96

0.92

-0.71* 0.53(2.32)

0.99

0.97


38/49

ID1

m.a

-dl

It(

x

P

-31

I

.-

=-

/-

l

e-

TABLE 3 Notes

(1) R2 is adjusted for degrees of fr eedom; * * indicates significant at the 1 Oh level, * atthe 5Or6 evel, # at the 1 O/6 level using 2 tail tests, x indicates significant at the 1 Ohlevel us ing a 1 tail test only. Figures in brackets are t ratios. There was noevidence of significant first order autocorrelation.(2) 0 = output; Nt- 1 = lagged empl oyment; t = time trend; D = binary variable; X1= D1 x log0 except for RM where = real wages; X2 = 9 x IogQ.(3) For HMSO the dummy variable is lagged to 1982. See discussion in text.

Source: Parker and Hartley, 1991 a, Table 3, p 412.


39/49

TABLE 4: THE LABOUR AND TOTAL FACTOR PRODUCTIVITY RESULTS

OrganisationTrading findsHMSO 1977-8019814341982-85Royal Mint1972-75197679Royal OrdnanceFactories 1971-741975-78Public corporationsPost Off ice Postal1966-691970-73Post OfficeTelecommunications196649197&73London Transport196669197&731980-831984-87Ownership changesRolls-Royce1967-701971-74British Aerospace1973-76

1977-801981-84National FreightCOllSOdllTl1977-801980-831983-86British Airways1976791980-831981-U

Whole economyLP TFP

0.5 -2.4 -1.3 -0.80.2 -5.0 -3.3 -1.07.1 -3.5 3.8 -3.2-6.3 -3.6 -8.5 -6.96.2 1.7 2.3 4.2

1.1 2.5-2.8 -9.44.1 -7.7-8.1 -7.06.6 5.7

9.6 2.5 8.9 1.8 7.6 -1.26.3 1.2 3.4 1.3 6.6 4.5

4.0 -4.4 -8.1 -5.6-1.5 -4.8 -0.4 -3.6 n.a. n.a.

2.2 a.4 -2.0 -1.68.6 -1.0 9.7 0.2 n.a. n.a.

-0.6 -1.5 -3.8 -2.7a.1 -4.4 -1.3 -3.2a.5 4.9 -5.7 -3.87.2 4.8 + *n.a. n.a

-10.4 -5.6 -13.6 -6.9 -11.1 4.010.6 2.5 9.9 1.8 8.6 -1.2

4.0 0.1 -0.9 -3.2 2.4 -2.0-1.2 -3.0 4.0 -1.3 0.1 1.94.0 -1.8 0.5 2.2 0.9 A.2

-0.7 -0.6 -3.55.0 0.3 -0.25.8 0.4 023.7 1.0 -0.35.7 3.6 0.55.3 1.1 1.8

1.01.41.23.54.75.1

n.a n.a

n.a n.a

PubliccorporationsLPUKmanufacturingLP

Source: Hartley, Parker and Martin, 1991, Table 3, p 56.


40/49

TABLE 4: Notes:* Privatisation distorts public corporation figures in this period, therefore results notreported.(1) Figures show difference, in percentage points, between an organisations averageannual productivity growth and the corresponding national average figure(organisation - UK).(2) LP = average annual growth in labour productivity (%).TFP = average annual growth in total factor productivity (76).(3 Figures based upon output deflated by each organisat ions nearest own pricedeflator or a physical output series where available.a 1983-85 only.n.a not applicable, service industry.


41/49

TABLE 5: SUMMARY OF THE FINANCIAL RATIO TESTS

NCI totaltrcatmg any.

OrganizationDate ofstatuschange Stocks

Debtorsratio ratio

WagesratioFixedassetsratio

change in theValue stocks BndProfitability added Net debtors ratiosratio ratio total as improvements

London TransportLondon TransportHMSONational FreightPost Office(telecommunications)Post Office(postal)British AirwaysRolls RoyceRoyal OrdnanceBritish AerospaceBritish Aerospacen/a: not available

1970 Improved No change No change No change No change No changelY84 improved Detcrioratcd No change Improved No change No change1980 Improved Deteriorated Dctcrioratcd No change lmprovcd n/a1982 Dctcrioratcd No change lmprovcd Detcrioratcd Improved No change

1 11 30 20 2

lY6Y n/a Dcterioratcd lmprovcd No change1969 Improved n/a lmprovcd Dctcriorated No change No change1980 lmprovcd No change No change No change lmprovcd lmprovcd1971 improved lmprovcd lmprovcd No change lmprovcd lmprovcdlY74 lmprovcd nla No change lmprovcd lmprovcd lmprovcd1977 No change n/a lmprovcd No change No change No change1981 Dctcrioratcd No change No change No change No change No change

No change No change 0 21 13 35 54 41 I

-I 1

Source: Parker and Hartley, 1991 b, Table 5, p 640.


42/49

OWNERSHIP STATUS AND PERFORMANCE - DID PERFORMANCE CHANGE AS EXPECTED?I

FinancialRatiosOrganisation Labour Total FactorProductivity Productivity EmploymentFunction

British Airways Yes Yes Yes YesLondon Transport(1984 change)NFCRoyal MintBritish Aerospace(privatisation)HMSOPost OfficeTelecommunicationsPost Off icePostalBritish AerospaceNationalisationRoyal OrdnanceFactoriesLondon Transport(1970 change)Rolls Royce

YesYesYes

YesYesYes

YesYes

Yes?

YesYes

Yes?No

Yes?Yes

Yes Unclear Yes?

Yes Unclear No

Yes Unclear Yes?

No No? No

NoNo

YesNo

NoNo

YesYes?N/A

Yes?Yes?

Yes?

Yes

No

YesNoNo

11 1 t 1 1 1 1 1 1 1 -t I -.I i 1 I 1 1 ) t

TABLE 6


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eld School of Managementnstitute of Technologyfield Bedford MK43 OAL England.National Bedford (0234) 75 I 122International +44 234 75 I 122826559 CITMAN Gax (02341 75 1806

W CranfieldCranfield School of Management Working Papers Series has been running since 1987, withximately 300 papers so far coming from the seven major academic subject areas of the School:and Small Business Development in the UK and overseas; Finance, Accounting and Economics;Resources and Management Development; Information Systems Management; Marketing andoperations and Project Management; and Strategic Management. In 1991, the School merged withCranfield School of Policy Studies, resulting in two new subject areas, the Social Policy faculty being re-into the new Public Sector Management Group, and a Centre for Logistics and Transport Studies.92, papers from all groups will be included in the Series. From 1992, papers are reviewed by seniorbers of faculty before acceptance into the Series.

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SWP 16190 Yochanan AltmanThe Organisational Culture of the ArmedForces: The Case of the Israeli ArmySWP 17/90 Paul BurnsManaging a Partnership for Business SuccessSWP 18/90 Sue Birley & Paul WesthdSpatial Variations in Private Advertised Salesin the UK, 1983-1988SWP 19190 Keith Ward, Sri Srikanthan, Richard NealStrategic Brand AccountingSWP 2oM Yochanan AltmanThe Relocations of Companies: The Human

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*-

-L

ta

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SWP 69191 David ParkerGwnership, Managerial Changes andPerformanceSWP 70/9 1 Graham Elkin (Visit ing Fellow)Socialisation and Executive MBAProgrammesSWP 71191 Shai VyakamamThe New Europe from the Third WorldSWP 72/91 John HaileySmall Business Development in theDeveloping World: An Overview ofContemporary Issues in EnterpriseDevelopmentSWP 73191 Paul BurnsTraining Within Small FirmsSWP 74/91 Paul Burns & Christine ChoisneHigh Performance SMEs in Britain andFrance: Strategies and StructuresSWP 75191 Robert Brown et alUK Tax Implications for the Small Business

SCHOOL WORKING PAPERSLISI NO 6,1992

SWP l/92 Mike SweeneyHow to perform simultaneous pmengineeringSWP 2192 Paul BurnsThe Management of General Pract iceSWP 3/92 Paul BumsManagement in General Practice: A Selectionof ArticlesSWP 4/92 Simon Knox & David WalkerConsumer involvement with grocery brandsSWP 5192 Deborah Helman and Adrian PayneInternal marketing: myth versus reality?SWP 6192 Simon Knox & Leslie de CbematonyBrand price recall and the implications forpricing researchSWP 7192 Shai VyakamamSocial Responsibility in the UK Top 100

Companies

SWP 8192 Susan Baker, Dr Simon Knox and Dr Lesliede ChematonyProduct Attributes and Personal Values: AReview of Means-End Theory and ConsumerBehaviourSWP 9192 Mark JenkinsMaking Sense of Markets: A ProposedResearch AgendaSWP 10192 Michael T Sweeney and Ian OramInformation Technology for ManagementEducation: The Benefits and BarriersSWP 1 /92 Keith E Thompson (Silsoe College)International Competit iveness and BritishIndustry post-1992. With Special Reference to

the Food IndustrySWP 12192 Keith Thompson (Silsoe College)The Response of British SupermarketCompanies to the Internationalisation of theRetail Grocery IndustrySWP 13J92 Richard KayThe Metaphors of the Voluntary/Non-ProfitSector OrganisingSWP 14/92 Robert Brown and Philip Poh

An&o Jewellers Private Limited - Case Studyand Teaching NotesSWP 15192 Mark Jenkins and Gerry JohnsonRepresenting Managerial Cognition: TheCase for an Integrated ApproachSWP 16192 Paul BurnsTraining across Europe: A Survey of Smalland Medium-Sized Companies in FiveEuropean CountriesSWP 17192 Chris Brewster and Hem-& Holt LarsenHuman Resource Management in Europe -Evidence from Ten CountriesSWP 18/92 Lawrence CummingsCustomer Demand for Total LogisticsManagement - Myth or Reality?SWP 19192 Ariane Hegewisch and Irene BruegelFlexibilisation and Part-time Work inEuropeSWP 20192 Kevin Daniels and Andrew Guppy

Control, Information Seeking Preference,Occupational Stressors and PsychologicalWell-being


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SWP 21/92 Kevin Daniels and Andrew GuppyStress and Well-Being in British UniversityStaffSWP 22/92 Colin Armistead and Graham ClarkThe Value Chain in Service OperationsStrategySWP 23192 David ParkerNationalisation, Privatisation, and AgencyStatus within Gove mment: Testing for theImpoItance of ownershipSWP 24192 John Ward

Assessing and Managing the Risks of IS/ITl.LWestments

SWP 25192 Robert BrownStapleford Park: Case Study and TeachingNotesSWP 26192 Paul Bums 8c Jean Ha&onManagement in General Practice - 2SWP 27192 Paul Bums & Jean HarrisonManagement in General Practice - 3SWP 28/92 Kevin Daniels, L.&e de Chernatony &

Gerry JohnsonTlxmetical and Methodological Issuesconcerning Managers Mental Models ofCompetit ive Industry Structures

nationalisation, privatisation, and agency within government

Documents