Green on Privatisation

8/11/2019 Green on Privatisation

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Seeking a Premier League Economy: the Role of Privatisation*

Richard Green

University of Hull

Jonathan Haskel

Queen Mary and Westfield College and CEPR

April 2000

Revised, Feruary 200!

Prepared for CEP"#F$"%&ER Conferen'e Seeking a Premier League Economy,(ondon,

)e'e*er +-, 2000

.E( Classifi'ation/ (!!, )2

1eyords/ privatisation, produ'tivity, 'ontra'tingout

Astract

We revie 3a4 t5e 5istory of U1 privatisation 34 its li6ely t5eoreti'al effe'ts on effi'ien'y and

3'4 its effe'ts on produ'tivity7 As for 5istory, e argue t5at Mrs 85at'5er9s privatisation pro

gra**e as a real rea6 fro* past poli'ies, alt5oug5 *any of t5e privatised fir*s 5ad een in

private oners5ip efore t5e $e'ond World War7 :n produ'tivity, e asse*le a ne 'o*

panylevel data for so*e of t5e *a;or 'o*panies privatised in t5e pert resear'5 assistan'e7 85e plantlevel data in t5is paper as prepared under t5e :%$

&usiness )ata (in6ing Pro;e't7 Errors are our on7


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Taken together, the privatisation program in Britain probably marked the largest transfer of

power and property since the dissolution of the monasteries under Henry VIII !irie, "#$$%&

!" #ntroduction and summary

#n


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After all t5is, it see*s appropriate to as6/ did t5e U1 e'ono*y need privatisationG 8o

t5e e>tent t5at 'o*petition *atters, and not oners5ip, privatisation ould see* to e irrelev

ant7 85us t5e i*perative Buestion is to devise appropriate regulation *e'5anis*s and introdu'e

'o*petition, and t5ese design issues are i*portant in developing t5e ne>t p5ase of privatisation,

na*ely t5e Private Finan'e #nitiative 3PF#4 and ot5er puli'private partners5ips7

&ut to t5e e>tent t5at preprivatisation restru'turing *atters, t5e effe't of privatisation is

rat5er sutle 3and ould not e pi'6ed up in 'onventional regression analysis of 'o*pany per

for*an'e47 Restru'turing of puli' se'tor fir*s needs toug5 de'isions 3to 'lose don plants for

e>a*ple47 85at *ay 'o*e fro* a strong *inisterial personality, ut t5is is all too rare7 &ut it

*ay also 'o*e fro* t5e t5reat 3or pro*ise4 of privatisation in t5e future7 85us privatisation is

per5aps seen as a 'redile signal of puli' se'tor toug5ness t5at politi'ians 'annot ot5erise

give7 Furt5er*ore, t5e fa't t5at privatisation 5as een 'arried out 'onfers an advantage to *in

isters on t5e left of t5e politi'al spe'tru*/ t5ey 'an no 'redily 'o**it not to 5ave to inter

vene in *any for*erly puli' se'tor de'isions7 85is *ig5t e>plain 5y renationalisation 5as

vanis5ed fro* t5e U1 (aour govern*ent9s agenda, alt5oug5 it 5as intervened sele'tively fro*

ti*e to ti*e7

$" Pulic %&nershi' in the ()

#n tended to 2 years7 Unfor

tunately, t5is frag*ented oners5ip stru'ture *ade it al*ost i*possile to gain e'ono*ies of


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s'ale, sin'e *uni'ipal underta6ings 'ould not e>pand eyond t5eir oundaries, and t5e private

'o*panies, potentially larger, ere in pra'ti'e s*aller 3Hanna5,


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it5 sustantial govern*ent s5are5oldings K t5e govern*ent 5ad ta6en a strategi' sta6e in &rit

is5 Petroleu* efore t5e First World War, and later a'Buired Cale and Wireless, 5i'5

provided tele'o**uni'ations servi'es in a nu*er of 3t5en4 &ritis5 'olonies7

#n


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5ig5 point of e'ono*i' analysis in t5e 'ontrol of nationalised industries, reBuired 'orporations

to ase t5eir pri'es on I'osts at t5e *arginJ, and to use a test dis'ount rate of - 3in real ter*s4

in all invest*ent appraisals7 Finan'ial targets ere intended to e 'o*patile it5 t5ese e'o

no*i' rules7 #n t5e early i*isation4 and different incentives7 85e different in'entives arise e'ause a puli' se'tor fir* is

not vulnerale to ta6eover or an6rupt'y and 5as a different infor*ation relations5ip it5 its

oners7D

85e te>too6 argu*ent for puli' oners5ip 'entres on differen'es in o;e'tives eteen

private and puli' fir*s7 Profit*a>i*ising fir*s it5 *ar6et poer ill produ'e ineffi'iently lo

levels of output relative to elfare *a>i*ising fir*s 3assu*ing t5at 'osts are independent of

oners5ip47 Furt5er*ore, *any utilities 5ave in'reasing returns and so *ar6et poer7 85e rationale

for puli' oners5ip is t5en 'lear, na*ely a '5ange in o;e'tives to in'reases so'ial elfare,

alt5oug5 t5e rationale for puli' oners5ip of industries it5out *ar6et poer is less 'lear7

85ere are at least to prole*s it5 t5is vie7 First, it is not 'lear t5at oners5ip is

ne'essary to otain a so'ially opti*al output level, for a regulator 'ould si*ply reBuire fir*s to

produ'e at t5at ne'essary level7 85e prole* is of 'ourse t5at regulators are unli6ely to 6no 5at

t5e so'ially effi'ient output level is, ut t5en neit5er ill govern*ent7 $e'ond, t5e apparent

ineffi'ien'y in puli' fir*s 3Pry6e, ing t5e assu*ption t5at puli' and private

D:ners of puli' fir*s are voters "*inisters 5ereas oners of private fir*s are s5are5olders "*an

agers7


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fir*s 5ave si*ilar 'osts7 &ot5 t5ese argu*ents suggest e>a*ining produ'tive effi'ien'y in puli'

and private fir*s7

85ere are to *ain approa'5es to t5is7 85e agencyapproa'5 to privatisation fo'uses on t5e

prin'ipal"agent relations5ip eteen t5e oner and a *anager 3private se'tor4 and govern*ent and

*anager 3puli' se'tor47 Assu*ing t5at t5e private se'tor is *ore effe'tive at *onitoring

*anagerial a'tivity t5an t5e puli' se'tor, privatisation i*proves produ'tive effi'ien'y y ensuring

t5at *anagers supply effort and 6eep don 'osts 3&os, i*ise profits, 5ereas t5e o;e'tives of puli' se'tor

organisations are a 'o*ination of profits, 'onsu*er surplus and t5e elfare of puli' se'tor

e*ployees7- Under various 'onditions 3Has6el and $an'5is, i*isation is to raise effort7 85e intuition for t5is result is

straig5tforard7 Privatisation 'an t5en e vieed as a ay of 'o**itting t5e govern*ent to not pay

5ig5 ages and"or a''ept lo effort7 #t is a *et5od of delegating aut5ority over age and effort

argaining for a govern*ent 5i'5 is unale to 'o**it itself to argaining at ar*s9 lengt5 it5 t5e

or6for'e7 A union argaining it5 a private fir* fa'es, at t5e *argin, a fir* unilling to 'on'ede

to de*ands for 5ig5 ages and lo effort7=

&ot5 *odels ould predi't relatively 5ig5 e*ploy*ent and lo effort efore privatisation7


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Privatisation of natural *onopolies ill usually reBuire regulation7 Cost of 'apital reg

ulation, 'o**on in t5e U$ for e>a*ple, is li6ely to lead to over'apitalisation 3Aver'5 and

.o5nson, a*ination, natural *onopolies often 'onsist of parts 5ere 'o*petition is

indeed not feasile 3trans*ission of ele'tri'ity, railay lines4 and ot5ers 5ere it is 3generation

of ele'tri'ity and energy retailing4 and t5e privatisation and restru'turing pro'ess 'an ta6e a'

'ount of t5is7 85ird, it5 te'5ni'al '5ange, t5e te'5nology t5at 'auses natural *onopoly 'an

'ease to e of su'5 great i*portan'e 3t5e develop*ent of *oile p5ones for e>a*ple47 Finally,

'o*petition 'an e'o*e part of regulation7 Nardsti'6 'o*petition 3$5leifer, a*ple4 depend

ent on ot5er region9s 'osts, t5us providing good in'entives for 'ost redu'tion7pands

t5e infor*ation ase upon 5i'5 to rite 'ontra'ts7 Au'tions are also li6ely to e elfarei*proving

sin'e t5ey reveal 5at as private infor*ation7 :n all t5is see Li'6ers 3


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#n ploiting t5eir *onopoly

'olle'tive argaining position 777 7 Privatisation 777 *a6es it possile to lin6 pay to su''ess and to

provide appropriate reardsJ 3.o5n Moore MP, Buoted in 1ay et al7,


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govern*ent to turn &ritis5 Airays fro* a puli' 'orporation into a li*ited 'o*pany, suitale

for privatisation, ut it started to *a6e 5uge losses due to t5e re'ession in t5e airline industry,

and a sale as 'learly inappropriate7

t5e re'ession, ut it as oug5t y a 'onsortiu* of *anagers, e*ployees and pensioners 5o

elieved t5at t5e 'o*pany as aout to turn around7 Helped y selling so*e of its surplus

property, it did so7 %evert5eless, privatisation as pro'eeding on a s*all s'ale, and as not a

*a;or politi'al issue7'ess7 A ne 6ind of advertising 'a*

paign as designed,

airlines, &A a*ong t5e*, 5ad engaged in predatory pri'ing7 85e *atter as settled out of 3U$4 'ourt

after 5i'5 &A as sold7


12/52

Fro* t5is ti*e onards, a signifi'ant part of t5e ele'torate sa privatisation as an easy

ay to *a6e *oney,-! 3&ritis5 $teel"Corus47 1ay suggests t5at t5is refle'ts t5e diffi'ulties of truly transfor*ing a national

ised industry into a private 'o*pany, diffi'ulties t5at only gradually e'a*e apparent7 A gradual toug5

ening of regulation, and t5e very *i>ed re'ord of diversifying a'Buisitions y privatised 'o*panies, ill

also 5ave affe'ted t5eir perfor*an'e7


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85e railays ere also restru'tured, in a *ore 'o*pli'ated pro'ess, and ere privatised eteen

i*u* rate of return, ut no *ini*u*7 85is as intended to give

t5e 'o*pany stronger in'entives for 'ost effi'ien'y t5an a pure rate of return s'5e*e, under 5i'5

t5e 'o*pany 'ould appeal for 5ig5er pri'es if its 'osts rose and depressed its rate of return7 W5en

Alan Walters, t5e Pri*e Minister9s E'ono*i' Advisor, suggested an alternative, na*ely an output

related levy on profits 3designed to give t5e 'o*pany an in'entive to 6eep pri'es lo, sin'e t5e levy

rate ould fall as output rose4, $tep5en (ittle'5ild 3t5en a professor of e'ono*i's at t5e University

of &ir*ing5a*, later t5e U1 ele'tri'ity regulator4 as 'o**issioned to de'ide eteen t5e to


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s'5e*es7 He 'a*e up it5 a t5ird, a lo'al tariff redu'tion s'5e*e, under 5i'5 a as6et of &89s

pri'es 3in t5e *ar6ets it5 t5e least 'o*petition4 ould 5ave to fall y a preset a*ount in real

ter*s ea'5 year7 #n no*inal ter*s, t5ey 'ould rise y 3RP#4, 5ere RP# as t5e '5ange in t5e

retail pri'e inde>, and t5e preset real redu'tion, and t5is soon e'a*e t5e ni'6na*e for t5e

s'5e*e7 (ittle'5ild 3pli'it 'onstraint on do*esti' line rentals as introdu'ed to li*it t5e s'ope for t5is

realan'ing, ut ot5er industries 5ave not fa'ed su'5 'onstraints7 85e se'ond point relates to Buality7

For &8 for e>a*ple t5ere ere initially no Buality 'ontrols and it as idely per'eived t5at Buality

5ad deteriorated7 E>pli'it Buality targets 5ave no een introdu'ed7 Finally, &eesley and (ittle'5ild

3ious to speed along, and often otained favourale values of as a result7 $in'e t5en in

revies regulation 5as een set *ore toug5ly, ut if is to e '5osen in t5e lig5t of oserved

previous profit rates t5en RP# regulation is in danger of e'o*ing li6e rate of return regulation

it5 all t5e attendant in'entive prole*s7

$o*e of t5ese prole*s 'an e redu'ed y using yardsti'6 regulation 3$5leifer,


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different for*7 #n pra'ti'e, t5e U1 regulators use yardsti'6 'o*parisons to assess t5e effi'ien'y of

ea'5 'o*pany in t5eir industry, and 5en'e to predi't t5e 'ost savings 5i'5 ea'5 'o*pany *ig5t

*a6e over t5e ne>t four or five years7 85e 'o*pany9s pri'e 'ontrol is ased on t5e regulator9s

fore'ast of t5e 'o*pany9s 'osts 3Wadda*s Pri'e,


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Co*panies 3RECs4 ere alloed s*all real in'reases in t5eir distriution '5arges for several

years7 %C9s 'ap as first reset roug5ly to years after privatisation, and as only tig5tened

to a s*all e>tent, ut y t5e ti*e t5e RECs9 pri'e 'aps ere reset, in tra produ'tivity

for a longer period, and *aintaining in'entives for future redu'tions7 85e ele'tri'ity regulator,

in 'ontrast, elieved t5at t5e RECs9 profits ere so e>'eptional t5at a oneoff pri'e 'ut 'ould e

;ustified, it5out affe'ting t5eir in'entives for future pri'e redu'tions7 85e regulator proposed a

oneoff pri'e redu'tion averaging


17/52

privatised7 85e generators 'o*peted to sell poer to ele'tri'ity suppliers 3and t5en'e to 'onsu*ers4

in a 5olesale *ar6et organised around t5e Ele'tri'ity Pool, 5i'5 too6 daily pri'e ids fro* every

poer station and sele'ted t5e '5eapest ones7 85e to largest generators 'ontrolled +0 of t5e

industry9s 'apa'ity in tent t5at several generators fa'ed severe

finan'ial troules and t5e govern*ent organised a finan'ial res'ue pa'6age for &ritis5 Energy7 85e

privatisation did introdu'e rules for separating t5e distriution of ele'tri'ity fro* its retail sale

3supply4, 5i'5 alloed 'usto*ers to '5oose t5eir supplier7 85e in'u*ents rapidly lost *ar6et

s5are a*ongst larger 'usto*ers, ringing t5e *argins on serving t5e* don to 'o*petitive levels7

85e railays ere split into even *ore pie'es efore t5eir privatisation7 Railtra'6, 5i'5

as floated in May


18/52

Annual eneral Meetings, ut t5e 'o*pany ill not pay dividends7 85e stru'ture as 'arefully

designed to ensure t5at %etor6 Rail9s orroings ill not 'ount against t5e P$&R, ut does

represent a *ove aay fro* t5e previous p5ilosop5y t5at IstandardJ puli' li*ited 'o*panies

ould nor*ally give t5e est perfor*an'e72a*ple of t5is type of lieralisation as t5e deregulation of interuran 'oa'5ing in


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as to set pri'es 5i'5 re'over *ost of t5e 'osts of past gas pur'5ases at 5at 5ad e'o*e aove

*ar6et pri'es, 5ile ne suppliers ased t5eir pri'es on t5e loer pri'es t5en ruling722

85e *ain Buestion regarding 'o*petition is 5et5er ne fir*s 'onstitute a suffi'ient t5reat

to in'u*ents and so for'e pri'e redu'tions and Buality i*prove*ents7 #n t5e industries 'onsidered

5ere, t5is reBuires t5e* to 5ave a''ess to essential fa'ilities t5at ere previously 'ontrolled y t5e

in'u*ents, given t5e sun6 'osts of re'reating t5ese fa'ilities7 #n t5e 'ase of gas, t5e pipeline net

or6 is 3literally4 t5e sun6 'ost7 #n t5e U1 'oa'5ing *ar6et, t5e p5ysi'al fa'ilities of t5e Central

(ondon 'oa'5 ter*inal oned y t5e in'u*ent *ig5t 5ave een re'reated at *oderate 'ost, ut not

t5e netor6 enefits of eing ale to '5ange eteen so *any routes at one pla'e7 8o otain t5ese

enefits, an entrant denied a''ess to t5e ter*inal *ig5t 5ave 5ad to set up a national route netor6,

*a6ing s*alls'ale entry i*possile 385o*pson and W5itfield, perien'e suggests, 5oever, t5at t5e su''ess of lieralisation depends 'ru'ially on not endoing

t5e in'u*ent puli' fir* it5 advantages on a''ess to essential fa'ilities7

/" +he Effect of Privatisation

85is se'tion revies t5e eviden'e on t5e effe'ts of privatisation on produ'tive effi'ien'y,

produ't Buality, puli' se'tor union poer and attitudes to privatisation7 &eginning it5 effi

'ien'y, t5e ideal e>peri*ent ould presu*aly e to privatise rando*ly a set of fir*s and o

serve t5e differen'e in t5eir effi'ien'y after privatisation in 'o*parison it5 a 'ontrol group7 #n

pra'ti'e one 'annot do t5is and so t5e folloing issues arise in trying to ;udge t5e effe't of

privatisation on effi'ien'y7

First, 5at is a good *easure of effi'ien'yG (aour produ'tivity is one idelyused

*easure7 #t 5as 5oever a nu*er of draa'6s7 First, t5ere 5ave een idespread falls in la

our input folloing privatisation and 5en'e sustitution to 'apital 3Has6el and $Oy*ans6i,

a*ple, in t5e

data t5at e des'rie elo, in t5e 'ase of &ritis5 8ele'o* and &ritis5 as, invest*ent in t5e

period after privatisation averaged 20 *ore t5an t5e level eteen


20/52

*ent at a t5ird of its level during t5e

pli'itly restru'tured in order to e privatised, and 'ould not e sold until t5ey 5ad e'o*e *ore

effi'ient and profitale7 85us one *ust at least e>a*ine preprivatisation perfor*an'e7 W5et5

er t5is restru'turing is due to privatisation is a diffi'ult issue, sin'e one *ig5t argue t5at it as

only t5e t5reat of privatisation t5at provided a 'redile 'o**it*ent to restru'ture7 85ird, *any

privatisations, li6e t5at of &ritis5 as, are of t5e 5ole industry and t5us one 5as no suitale

'ontrol group7 #nternational 'o*parisons are potentially valuale 5ere 5ile if, for e>a*ple, re

gional a''ounts are availale pre and postprivatisation, internal 'o*parisons 'an e *ade7

Privatisation unfortunately freBuently tends to render regional a''ounts 'o**er'ially sensitive

and so 'onfidential, and t5us rat5er fe puli'ly availale studies 5ave in pra'ti'e een under

ta6en7

All t5is suggests loo6ing at a variety of national and international eviden'e7 &eginning

it5 U1 eviden'e, t5e upper panel of tale s5os *ulti'o*pany and single 'o*pany studies7

Pry6e9s 3tre*e e>a*ple of t5is is Railtra'6, 5i'5 5ad


21/52


22/52


23/52

:ur first year, 'eptions4, ut giving little eviden'e t5at

t5e faster grot5 rate as sustained after privatisation7 #n ot5er ords, t5ere is a 'at'5up rat5er

t5an a per*anent '5ange of pa'e7

:ur results 'an e 'o*pared to t5e loer panel of 8ale , 5i'5 s5os so*e studies

of individual fir*s7 Wadda*s Pri'e and Wey*an.ones 3


24/52

privatisation restru'turing re*ains an open Buestion t5at is unli6ely to e e'ono*etri'ally test

ale7

The sources of productivity groth.

Even if su'5 studies s5o i*prove*ents in 8FP t5ey do not isolate t5e sour'es of su'5 i*

prove*ents7 85ere are a nu*er of possile sour'es7 First, t5ere *ig5t e '5anges in or6

pra'ti'es in given plants7 $an'5is 3


25/52

interestingly, proportionately *ore 'losure in t5e private se'tor in t5e years efore privatisation

at least7

85e last fe ros of t5e tale s5o laour produ'tivity levels and grot5 2=7 85e pi'

ture is 'lear7 85e puli' se'tor 5ad si*ilar laour produ'tivity to t5e private se'tor ut *u'5

loer 8FP7 &ut produ'tivity grot5 as *u'5 5ig5er in t5e puli' se'tor7 85is suggests t5at

puli' plants sustantially 'aug5t up to private plants over t5e period7 %ote t5at in t5e post

privatisation years t5ere as negative 8FP grot5, 5i'5 as during a re'ession7 Alt5oug5 e

5ave data on 5ours or6ed e *ay not *easure s5ort ti*e or6ing and so 5ave negative 8FP7

Ho did t5e produ'tivity gains 'o*e aoutG #f t5e pe't t5ere to e plenty of s'ope for produ'tivity i*

prove*ent it5out 'losure7 Alternatively, it 'ould 5ave een t5at t5e average as roug5t

don y so*e very poor plants 36ept open due to soft udget 'onstraints in t5e puli' se'tor for

e>a*ple4 in 5i'5 'ase it 'ould 5ave een sustantially raised y 'losure7 8o *easure t5is e

t5erefore de'o*pose produ'tivity grot5 as follos7 Write industryide produ'tivity in year t

asPtSitpit5ere iis t5e e*ploy*ent s5are of estalis5*ent iandPtandpitare produ'tivity

*easures 3laour produ'tivity and 8FP47 85e de'o*position proposed y Foster, Haltianger

and 1riOan 3 nu*ers in unalan'ed panels

raise a nu*er of signifi'ant 'o*pli'ations 3ood et al,


26/52


27/52

ive on effi'ien'y gains, for t5is industry at least7 Rat5er t5an 6eeping open ineffi'ient plants, it

ould see* t5at *u'5 of t5e ineffi'ien'y is due to ineffi'ient or6 pra'ti'es it5in e>isting

plants7

'uality of service

W5ilst produ'tivity is i*portant, servi'e Buality 'learly also affe'ts elfare7 Criti's of privat

isation 5ave feared t5at it ould lead to loer levels of Buality7 #n 'o*petitive industries, t5is

s5ould not e a prole*, ut *onopolies fa'e different in'entives, and a privatised fir* *ig5t

e ale to raise its profits y redu'ing Buality 3espe'ially if it 'an e'ono*ise on Buality in order

to 5it regulated target indi'ators47 85ese fears ere intensified in tended, fining t5e

'o*panies if t5ey failed to *eet overall perfor*an'e targets7 85ere is alays a danger t5at

'o*panies ill respond to in'entives of t5is 6ind y 'on'entrating on t5e aspe'ts of Buality

5i'5 are eing *onitored, 5ile ignoring ot5er aspe'ts, ut t5e data for t5e ele'tri'ity industry

i*ply a road i*prove*ent sin'e privatisation7 For e>a*ple, figure ! elo s5os t5e nu*er

of *inutes lost per 'usto*er in t5e ele'tri'ity industry in reat &ritain sin'e


28/52

lated, and s5ould not used to define a trend, ut t5ere is a 'lear, if slig5t, donards trend sin'e

'eeded t5e fines, 'reating politi'al diffi'ulties7 Furt5er*ore, t5ree *a;or

a''idents in four years 3$out5all, $epte*er


29/52

t5e rest of t5e e'ono*y7 $in'e privatisation 'overed t5e energy se'tor, one possiility is t5at

privatisation loered energy pri'es elo 5at t5ey ould ot5erise 5ave een7 85is raises

t5e possiility t5at privatisation *ig5t 5ave een a positive energy pri'e s5o'6 and 5en'e *ay

5ave affe'ted produ'tivity ;ust as t5e negative energy s5o'6s *ay 5ave done so 3&runo and

$a'5s, tent t5at it is unions 5aving 5ig5level 'onsultation it5 *inisters on

strategi' poli'y for nationalised industries, t5en privatisation 5as 'learly redu'ed t5is drasti'ally7

Hoever, sin'e in t5e tent t5at it is unions 5aving for e>a*ple parti'ular argaining rig5ts

35en estalis5ed nationalised industries ere reBuired to 'onsult and negotiate it5 or6ers4

t5e pi'ture is very *i>ed7 &argaining arrange*ents '5anged for e>a*ple in t5e Post :ffi'e,

5ere t5e separation into Mail, Par'els and Counters in t5e early


30/52

in t5e period of preprivatisation restru'turing in all of t5e 'ept &ritis5

Airays47

85ird, did privatisation '5ange people9s attitudes to t5e puli' se'torG 8ale


31/52

t5oug5 t5ere as so*e eviden'e t5at early 'ontra't aards 5ad involved *u'5 loer pri'es t5an

t5is, 5i'5 t5ey argued ere unsustainale and refle'ted Iinner9s 'urseJ effe'ts47

)o*erger and .ensen 3i*ately 2 illion of 5ite'ollar servi'es 5ad een su;e'ted to 'o*petitive tendering y

a*ple, refuse or6ers *ig5t e ale to serve

an area in a s5orter ti*e t5an as alloed in t5eir roster, and ould ta6e t5e differen'e as leis

ure7 Preserving su'5 rents is not ne'essarily a legiti*ate o;e'tive of puli' poli'y, 5oever74

Coun'ils9 Idire't laour organisationsJ ere alloed to id against private fir*s7 #n

t5e early studies, 5ere t5ese organisations on 'ontra'ts, t5ey ere offering 'ost savings

5i'5 ere not signifi'antly different fro* t5ose under 'ontra'ts aarded to t5e private se'tor,

suggesting 3yet again4 t5at 'o*petition rat5er t5an oners5ip is t5e 6ey to effi'ien'y7 After t5e

introdu'tion of 'o*pulsory 'o*petitive tendering, 5oever, $Oy*ans6i 3


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85ere ere fears t5at Buality ould also e i*paired 5en servi'es ere 'ontra'ted

out7 #n pra'ti'e, 5oever, servi'e levels appear to e *aintained or even en5an'ed, per5aps e

'ause 'ontra'ting out 5as een asso'iated it5 greater *onitoring, and *ore e>pli'it standards

3)o*erger and .ensen,


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set depending on all possile 'ir'u*stan'es t5at 'ould in turn e verified7 != :n'e t5e prison is

in servi'e, ris6s are *ore li6ely to 'o*e fro* govern*ent poli'y, su'5 as ne legislation rais

ing t5e prison population, and a *ore fle>ile 'ontra't *ay e appropriate7 Anot5er advantage

'lai*ed for t5e PF# is t5at it re*oves puli' se'tor invest*ent fro* t5e P$&R7 85is is not ;ust

'os*eti', as t5e P$&R 'an e a inding 'onstraint on govern*ents, and *oving invest*ent out

side t5e P$&R allos in'reased spending7 85e reBuire*ent to transfer ris6 is, in part, a ay of

ensuring t5at a PF# pro;e't is *ore t5an ;ust a ay of orroing *oney it5out 'ounting it to

ards t5e P$&R7

Against t5is, t5e PF# 5as so*e potential disadvantages7 First, it 'an only or6 ell if

outputs and inputs 'an e *easured and 'ontra'ted over 'learly7 $e'ond, PF# 'ontra'ts 'an e

infle>ile/ t5e govern*ent 5as to 'arry on it5 a pro;e't, even if it de'ides it does not is5 to7

85ird, t5e PF#, as it5 dire't orroing y t5e govern*ent, transfers 'osts to future generations

3'o*pared it5 spending out of 'urrent ta> revenue4 5i'5 *ay or *ay not e desirale7

Criti's of t5e PF# point out t5at t5e 'as5 'ost of PF# pro;e'ts is in'reased y t5e 5ig5er

interest rates reBuired y t5e private se'tor 'o*pared to t5e 'ost of puli' orroing7 $o*e of

t5e value for *oney 'o*parisons, in 5i'5 t5e PF# nevert5eless appears to e t5e '5eaper op

tion, assu*e very large effi'ien'y gains fro* private se'tor delivery to offset t5e 5ig5er interest

'ost7 rout 3 pro;e'ts depended on t5ese savings

to pass t5e value for *oney test 3Art5ur Andersen and Enterprise ($E, 2000, 7=47

85e Buestion is 5et5er t5e susidy s5ould e *ade e>pli'it in t5is ay7 #f t5e PF#

transfers so*e ris6s aay fro* t5e govern*ent, does t5at redu'e t5e interest rate on t5e national

detG #f t5e 'apital *ar6ets elieve t5at t5ere is no '5an'e of default y t5e &ritis5 govern*ent,

5et5er or not it 5as to ear t5e ris6s involved in PF# pro;e'ts, t5e i*pli'ation is t5at t5e interest

rate on t5e national det is not affe'ted y t5e PF#7 0 #f t5is is t5e 'ase, it 'ould e argued t5at

pro;e'ts it5in t5e puli' se'tor re'eive Iinsuran'eJ against ris6s at no real 'ost to t5e ta>payer,

!=$u'5 ris6s 'an e 5ard to predi't, 5oever7 85e $6ye &ridge PF# pro;e't lo'al puli' enBuiry resulted

in delays and design '5anges 3in order to prote't a lo'al otter population4 'osting !7-* out of a total 'ost

of !=* 3Pollitt, 200047085is argu*ent applies to t5e 'urrent state of t5e &ritis5 e'ono*y K it ould 'ertainly not 5old true for

all 'ountries, or even all periods in &ritis5 e'ono*i' 5istory7


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5ile t5e PF# reBuires t5e ta>payer to pay t5e private se'tor for ris6earing7ed e>perien'e of t5e PF#7 :n

t5e positive side, t5e %A: reports t5at a nu*er of pro;e'ts 5ave gone a5ead t5at si*ply ould

not 5ave een finan'ed ere t5ey to 5ave 'o*e out of t5e puli' se'tor 'apital udgets 3e7g7 t5e

C5annel 8unnel Rail lin6 and t5e $6ye &ridge, %A:,


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t5orities started to for'e open t5e industry7 An open Buestion is 5et5er t5e 'o**it*ent to

privatisation as essential to otaining t5ese gains7

We s5ould also as6 5et5er t5e 'lear '5ange in t5e levelof produ'tivity t5at 5as een

asso'iated it5 privatisation 5as evolved into 5ig5er rates of produ'tivity grothG 85e prole*

5ere is t5at t5e pro'ess of I'at'5ing upJ to private se'tor levels of produ'tivity 'an easily ta6e

t5e est part of a de'ade, and it is only on'e t5at pro'ess is 'o*plete t5at e ill e ale to dis

'ern 5at 5as 5appened to grot5 rates7 At t5e *o*ent, all t5at e 'an say is t5at it is 5ard to

see an effe't of privatisation on produ'tivity grot5 rates7 85e effe't of privatisation on Buality

see*s to depend on strong regulation7

Privatisation in t5e sense of asset sales is no *ore or less finis5ed in t5e U1, for t5e

si*ple reason t5at t5ere is little left to sell7 85us t5e 6ey Buestions for t5e future are developing

regulation and res5aping t5e PF#7 #t is also li6ely t5at future ad*inistrations ill ant to use t5e

private se'tor *ore in delivering 5ealt5 and edu'ation servi'es7


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References

Aot, 1, and 85o*pson, ), 3)o*erger, $7, $7Meado'roft and )785o*pson 3


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ood, ), %adiri, M7 and $i'6les, R7, 3 %u*er and Fa'tor )e*and Approa'5es to t5e Es

ti*ation of Produ'tivityJ in M7 Peseran and P7 $'5*idt eds, Handoo6 of Appl@ied E'ono*etri's,

Lolu*e 2, Mi'roe'ono*etri's, :>ford, &asil &la'6ell7

reen R7, and %eery, )7, 3rout, P 3

Has6el, .7 and $an'5is, A7, 3


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Millard, %7, and $tevens, M7, 3


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$Oy*ans6i, $7 3


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8ale 2

Events in 6ey nationalised industries7

7ationalised Privatisation

announced

Restructured

&hile 'ulic8

Privatised Su9ect to

RP#;8

Lieralised8 Post 'rivatisation events


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8ale

$tudies of privatisation and regulation effe'ts

$tudy Measure of

produ'tivity

Controls Co*panies stud

ied

Nears Findings/ produ'tivity rises it5

Re*ar6s

Privatisation Regulat

ion

Co*

petitionMulti'o*pany

studies

After &efore

Pry6e 3


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$tudy Measure of

produ'tivity

Controls Co*panies stud

ied

Nears Findings/ produ'tivity rises it5

Re*ar6s

Privatisation Regulat t

ion

Co*

petition

Multi'o*pany

studies

After &efore

Martin and

Par6er 3


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8ale

8otal fa'tor produ'tivity in t5e U1 puli' se'tor

3annual rate of in'rease, 4

Co*pany I


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8ale D

#ndustry data relevant for t5e plant level study

puli' after pri4 puli' after pri4 072 07+ 07!D

7umer of 'lants

Private puli' after pri4 puli' after pri4 7< 07+

7ote:data for Ipuli'J in


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+ale -a

Productivity decom'ositions6 !,3,$

3see eBuation


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8ale -

Quality indi'ators in &8


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Figure

Green on Privatisation

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