Has Privatisation Improved The Performance Of Previously State Owned Enterprises?

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Has privatisation improved the performance of previously state owned Enterprises?

Has privatisation improved the performance of previously state owned Enterprises?


Privatisation is one of the most important elements of transition in UK. In spite of the fact that privatisation is widespread internationally, the number of privatised enterprises in UK is more than in all the other countries of the world taken together. Moreover, unlike in other countries, where privatisation as a rule achieved its targets, the results of privatisation in UK seem to be ambiguous. It is a widespread opinion that privatisation in the country turned out to be a great failure. At the same time, there is a lack of statistically significant evidence on the matter.

The majority of studies in UK does not have a long enough post-privatisation period and are based on surveys covering one year. In the absence of time series, it is hard to find any clear evidence of the effect of privatisation, especially in conditions of extremely volatile transition processes. However, now 'the dust has settled' and we can look for systematic effects of privatisation. Privatisation in UK had many proclaimed targets, from formation of private property to attracting foreign investment. This papw=er is concerned with a crucial issue of privatisation: its influence upon industrial enterprise performance. It is well known that economic reasons lay behind the reform in UK, and it is widely believed that privatisation could seriously improve the efficiency of enterprises.


Vickers & Yarrow (1988) argue that managers of SOEs may lack high-powered incentives or may not be properly monitored. The residual cash flow claims of SOEs are not readily transferable like the shares of a private corporation. This impairs residual claimant incentives to monitor managers and, ultimately, degrades firm performance (Dewenter & Malatesta, 1998). Supervision by governments tends to be bureaucratic, rigid, more interested in seeing that regulations have been followed than that opportunities have been seized (Nellis, 1991). Under public ownership, the government retains unconditional control over the use of firm assets. This encourages rent-seeking behaviour by firm insiders. A government is vulnerable to political pressure to maintain established rents (high wages/low effort, high and secure employment, etc.); this leads to loss of incentives (Perotti & Guney, 1993). Private firms are supervised by self-interested shareholders. Private owners have stronger incentives than government appointees do to maximise profits because they own equity and so bear the financial consequences of their decisions. Private firms are also more capable of offering decent incentives and salaries to managers (Barberis et al., 1996). Private firms may find it more difficult to get public assistance; therefore, the penalty for failing to maximise profits is harsher, and perhaps the fruits of success are also sweeter (Phelps, 1992). Counter-arguments are that according to agency theory and the free-rider problem, the government is the major stockholder in SOEs and can monitor the managers more intensely than shareholders of diffusely held private corporations monitor their managers (Dewenter & Malatesta, ...
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