According to theoretical literature, the nature of the ownership of a firm – whether it is publicly or privately owned – should not impact its decision making or efficiency.
Mukul Asher, Professorial Fellow at the LKY School, recently published an article in which he argued for a reform of public enterprises in Asia.
According to theoretical literature, the nature of the ownership of a firm – whether it is publicly or privately owned – should not impact its decision making or efficiency. In fact, empirical evidence shows that examples of efficient (or competitive) and inefficient (or uncompetitive) firms exist at both ends of the spectrum. Moreover, traditional distinction between ‘public’ and ‘private’ firms has become too simplistic in as firms with more complex ownership structures have emerged.
There are many public sector companies which are inefficient, and there are private sector companies which are also inefficient. The main factors are the extent to which competition exists, the organisational and individual incentives, and whether technology is adapted to changing circumstances.
The drivers of organisational efficiency for a firm thus do not primarily lie with ownership, but with other factors. According to Prof. Asher, these are:
- The extent to which the firm operates in a competitive or contestable space. Market and/or regulatory discipline can ensure good information flow and the emergence of alternative ideas.
- The organisational incentive structure must be outcome and result oriented and not be designed to avoid accountability
- The incentive structure for individuals must be aligned with the broader goals of the organisation.
- The firm must not be resistant to technological change, especially if it operates in an area that experiences rapid technological change. In his article, Prof. Asher goes into detail about the indicators that can be used to assess the performance of public enterprises, as well as challenging ‘conventional wisdom’ in the public-vs-private debate.
HAW YEE: Some economists such as Ha-Joon Chang have also recently argued, as you do in this article, that who owns enterprises matter less in performance than the competitive pressures that they are subjected to. Why has there been a shift in thinking on this issue after decades of ‘conventional wisdom’ that private firms tend to outperform public ones?
MUKUL ASHER: Rigorous research does not support the hypothesis that ownership (public or private) is the primary factor in effectiveness of firms, whether private or public. As an example, Singapore Airlines, and Huawei Technologies of China are both public sector companies which are globally competitive. There are many public sector companies which are inefficient, and there are private sector companies which are also inefficient.
The main factors are the extent to which competition exists, the organisational and individual incentives, and whether technology is adapted to changing circumstances.
Joseph Stiglitz and Bruce Greenwald in their 2014 book Creating A learning Society (Columbia University Press) argue that in several economically successful countries, abilities of their firms and government to learn and absorb newer ideas have been important contributors.
Perhaps one of the reasons for conventional thinking is that privatisation debate has been conducted at ideological rather than technocratic levels. Thus, the World Bank’s database on privatization is based on shift of ownership from public to private sectors.
In any case, the complexity of many organisation forms which exist today cannot be easily captured in terms public or private. So it is encouraging that the public policy debates on this issue are becoming more nuanced and contextual.
Singapore had intensified its privatisation efforts in the 1990s. What are some of the lessons from Singapore’s experience, especially with its recent plans for partial renationalisation of the bus services?
MA: In Singapore, the main focus has not been change in ownership of enterprises from public to private, but on divesting, with control, selected public enterprises (such as SingTel, DBS and Singapore Airlines), and using a state owned Holding Company structure (through Temasek Holdings set up in 1974, for example) to obtain better performance from public enterprises. The control of these enterprises has remained with the government.
The current discussions about the bus service (and also mass rapid transit system) are not about ownership changes but about how to more effectively devise contracts, and redefine division of responsibilities among various parties which would permit better trade-offs between affordability, quality and quantity of service, and generating positive economic and societal value.
This one relates to India, which you used as an example in your article. Why is a discussion of public or private ownership of enterprises important at this stage of India’s economic development?
MA: Reform of public enterprises at both the Union government and at the State government level is important for India for two broad reasons. The first is that over the past several decades, substantial capital investment and human resources have flowed to public enterprises in India, but their contribution to GDP is substantially below what could be achieved. While the exact data are not available, the need to improve factor productivity, and in particular using capital deployed in public enterprises more productively, have become essential for raising India’s growth rate, and addressing issues relating to high cost structure.
The second reason is that annual public sector investment is much larger (around 7.5% of GDP in recent years) than annual public sector saving (around 1.7% of GDP). Financing this gap has implications for fiscal management and for financial and capital markets. To the extent the gap is financed by household and corporate sector saving, it crowds out their savings and investment opportunities.
Au Yong Haw Yee is a case researcher at the Case Study Unit, LKYSPP. His email is decb64_c3BwYXloeUBudXMuZWR1LnNn_decb64