Myth And Reality: The Curious Relationship of Government and Public Enterprise

1. Myth And Reality: The Curious Relationship of Government and Public Enterprise Ken Rasmussen February 4, 2004

2. The Myth and Realities • It is possible to maximize efficiency under any type of ownership? • Great deal of difference between what is theoretically feasible and what typically happens. • If government allows financial discipline to relax by paying subsidies, management many not try very hard to secure change • Hard for a PE to close down unprofitable plants to adjust manufacturing standards, or to introduce labour saving techniques in the face of political pressure

3. The Myth and Realities • The government is the final arbitrators on all matters of policy and is expected, in theory to give management clear direction and objectives • But those in government may disagree about provincial or national objective or find it politically expedient to not articulate these disagreements • Clearly when government is in business the pictures is complex. • Many opinions about the value of Public Enterprise are based on preconceptions and myths • Folklore is often mistaken for fact, and the experience of one country is often generalised as if all countries are the same.

4. Myth 1: The End of Capitalism • Public enterprise is ideological • State ownership of the “means of production” is a goal in itself. • legal status of property was a crucial determinant of the use of that property • Transfer of means of production believed to create a just economic system and ideal society based on co-operation, equality and mutual collaboration • transfer wealth producing assets from the private to the public sector, and the move would lead to a revolution in industrial democracy,reduce the reduce the cost to the consumers and create greater equity among individuals. • Reality was different, and the anticipation that state ownership will wipe out all problems crated by the greed of capitalism were exaggerated

5. Myth 1: The End of Capitalism • The dream that that nationalisation would redistribute property was not realised. Why? • Compensation had to be paid to existing owners. • Many of the nationalisation’s put lame ducks in the hands of the government (welcomed by private owners) • Does not really distribute income. • subsidies of electricity, food, water, bus transportation are are enjoyed by the rich as well. • Worker relations are not much better that in other firms • Worker alienation is centrally not reduced by state ownership • very unpleasant confrontations between government, management and workers take place in public enterprises • replace one set of professional mangers with another • No better environmental safety • Does not resolve issue of social responsibility

6. Myth 2: State ownership means creeping socialism • PEs are inefficient by definition and encroach on the freedom of the business • Large scale ownership creates centralised power, monolithic society • Yet it is difficult to generalise that PEs are inherently less efficient • Indeed many firms find themselves PE by the poor decision of private sector managers. • We know that the countless US firms and Canadian firms, have failed to maintain any form of competitive advantage

7. Myth 3: State ownership is based on ideology • While ideologically beliefs have been important, in creating Public enterprise, all countries have PE • Outside the declining communist world, PEs exist in similar percentages. • In Canada Conservative parties have created more Public enterprise that than socialist ones.

8. Myth 4: Public enterprise cannot reduce the size of their workforce • The evidence is clear on this: PE have over the years shed tremendous number of workers • The hypotheses that Public Enterprise managers are trying to maximise growth and employment is not proven • Left governments of course do find it difficult to allow massive reductions in the labour force

9. Myth 5: Public enterprise are rational actor serving the interests of the country • PEs are often portrayed as docile rational organisations attempting to achieve pre-determined ends set up by the government that controls them completely • The reality is more complex • No consensus on national or provincial objectives. • Many conflicts between government and PEs • Behaviour of PEs is best explained as a result of contests for control over resources, rather than as an outcome of pressures for efficient attainment of national or provincial objectives • Government’s feel that Public Enterprises are instrument of the state and can be used to reach all sorts of short-term goals • Government interfere because they think in political terms • Boards are to prevent this but often they are friendly, public servants, or cabinet ministers.

10. Myth 6: Public Enterprise gets Special Treatment from Government • Said to have an unfair position of competition • they are not required to earn profits, they pay lower or not taxes, they receive purchasing and sales preferences , and are favoured by international information reporting, trade and burden of proof regulations • The opposite may be true • subject to many more controls, they have to revel business secrets to competitors as part of parliamentary accountability, they are subject to many audit

11. Myth 7: Managers have job security • Do managers live forever? • It is difficult to establish managerial failure • They are risk adverse according to property rights theorists • But there are many officials that feel anything but secure

12. Myth 8: Alternative to Public Enterprise is a Free Market • If there is no PE will markets flourish • The real alternative to Public Enterprise is not lots of competition, but a monopoly, and oligopoly, cartel or government subsidised and heavily protected privately owned firm • Societies are dominated by giant firms, managed by professional managers, and owned by passive shareholders.

13. Myth 9: Cannot Attract Innovative Managers • contradiction between creativity and innovation public sector enterprise on the other hand. • Innovation and creativity need flexibility and organic organisation but public enterprise stable and predictable. • A private firms can work on new programs in relatively completes secrecy, while the work of the public sector is carried out in the glare of the press. • Accountability may dampen creativity and innovation • Even though there receive lower incomes many stay when • 1) some derive satisfaction form serving the public • 2) many want to run large more capital intensive enterprise, which are mainly state owned in some countries

14. Conclusions: The case of public ownership • To achieve re-distributive goals • To ensure adequate investment • To prevent monopolization • To facilitate coordination • To ensure safety or security • To reduce financial cost • To allow more macro-economic stabilization

15. Conclusions: The case for private ownership • Markets are good at allocating property rights • Bureaucrats are bad at running business • Explicit regulation can be more effective than oversight of a public corporation • Private ownership increases cost of disruptive government intervention • Private ownership reduces the influence of interest groups

16. Conclusions • Public ownership may be best for local monopolies were contracting and monitoring are difficult • Give private firms the wrong incentives to underpay for inputs, overpay for outputs and bribe politicians • Local transpiration is an example • Private provider might lobby to get rights of way for free, lobby for subsidies on unprofitable routes, demand high prices etc. • Best to leave it a municipal function