• Define Privatisation
• Practical and Theoretical Background of
• Privatisation Experience
• Privatisation and Improvements of
Management Control and Performance
• The most common and useful definition is `change of ownership of enterprise from
public sector to private sector'. But politicians and other people equate privatisation
with commercialisation and deregulation.
• „Deregulation ' or „Liberalisation' includes the liberalisation of entry into activities
previously restricted to the public sector and abolition of import controls (Cook and
• Liberalisation also includes removal of distortions in labour markets, capital markets,
product markets and market development (Cook Paul., 1986).
• The term 'commercialisation' include injection of private sector management practice
like decentralisation or division of organization structure, introduction of incentive
plans and balance sheet restructuring (Kay et al, 1986).
• A French social scientist, Andre Delion, used privatisation as four types of measures
like ownership change, deregulation, liberalisation of government policy towards the
private sector and the application of private sector management methods or criteria
to the public sector.
• But in economic terms privatisation remains in the transfer of ownership and /or
control of the avenues of supply of goods and services from the public sector to the
private sector (Adam et al, 1992; Roth, 1987).
• Eventually, under this definition, privatisation excludes commercialisation and
liberalisation but includes 1) The outright or partial sale of assets by the state 2) the
transfer of assets to the private sector under leasing arrangements and 3) the
introduction of management contracting arrangements.
Why Privatisation is Important to
Management Control Research?
• Advocates of privatisation consistently presume that ensuing
superior management controls will induce better performance
(Vickers and Yarrow, 1988).
• Assumed private management control including accounting control
techniques is superior and can be established in privatised
• Few Empirical research on this claim especially in less developed
countries (Cook and Kirkpatrick, 1995).
• Despite desired outcomes being contingent upon management
control practices in their underlying theories of privatisation,
development economists display little interest in empirically studying
their intricacies .
Background of Privatisation in
• PUBLIC SECTOR FAILURE
• INTERNAL POLITICS
• EXTERNAL PRESSURE
PRIVATISATION ARGUMENTS –
• Productive Efficiency Theories - Productive
efficiency stems from micro-economic theories
of property rights and agency within contractual
relationships (Adam et al., 1992),
• Allocative Efficiency Theory – It covers the
macro-economic effects of privatisation upon
public finances, capital markets and private
sector investments (Cook and Kirkpatrick, 1995).
Property Right Theory
• Property right theory expounds that managers minimise costs if
their rewards are directly related to economic performance
(Furubotn and Pejovich, 1972).
• Private owners induce more efficient managers through
managerial controls and incentives that maximise profits and
thence the value of property rights.
• There is a missing link between ownership and management
control in the public sector as no-one has an incentive to do
this: perceived costs will outweigh benefits since the latter do
not accrue to individuals (Hanke, 1986).
• In contrast, if private sector owners do not produce efficient
management controls or buy and sell assets to compete
effectively they will suffer market failure or a takeover. Because
public assets are not individually owned they lack transferability
characteristics (Hanke, 1986, p. 16) and are buffered from
• Agents act self-interestedly therefore principals must structure
incentives to make them act in congruence with their aims.
• It is argued that principal-agent relationships in the private
sector are simple compared to the public sector, as
shareholders have access to information to monitor
management and sanction its actions accordingly (Adam et al,
• In an efficient capital market, failure to perform to potential
leads to low share values making the company liable to hostile
• This threat creates a self-regulating incentive scheme (Jensen
and Meckling, 1976) which is absent in the public sector.
• Moreover, performance-related pay systems, central to agency
theory, are more difficult to implement and devise in public
sector organisations than private sector ones (Rees, 1985).
• Public enterprises are often created to improve income distribution and
resource allocation within an economy through investment in modern
• Neo-classical economists claim that public enterprises cannot match levels
of allocative efficiency achieved under market competition, as the pursuit of
personal goals by politicians, managers and workers within state enterprises
diverts performance into other channels.
• Competition enhanced by private ownership is seen as essential for
allocative efficiency as it reveals information crucial to efficient input usage
(Adam et al., 1992). Without these market references principals cannot
determine the correct amount and performance of management or the
• A profit fall could be due to lower demand or managerial inefficiency: in a
market profit and price information from competitors enables principals to
analyse and react to such situations whereas weakened competition
produces weaker signals of input-output links important to internal efficiency.
• This enables management of public enterprises to enjoy a tranquil life under
monopoly (Adam et al., 1992).
• Privatisation advocates see public financing, allocative efficiency and
privatisation as intertwined. Privatisation is claimed to reduce net budgetary
transfers, eliminate contingent external debt liabilities and reduce the
adverse effects of deficit financing.
Critique of Privatisation –
• Productive Efficiency Theories – Principal
• Principal – Agent may be relevant for classical
small firms but in the modern large limited
liability corporation the property rights of owners
• Diluted ownership in modern big corporations
reduces owners' control over managers:
Managers have considerable discretionary
power to further their own interests (Commander
and Killick, 1988; Adam et al., 1992).
Agency Theory - Critique
• Critics argue that this contains assumptions of dubious
• In practice access to complete information rarely prevails;
information processing is highly complex; and conflicts
within organizations create transmission barriers.
• Perfectly competitive markets are unlikely to occur in
developing countries where poorly organized capital
• Relationships and motivations are more complex than
agency theory envisages and possibly beyond its scope to
model them, for example trust is ignored (Armstrong 1991,
• Links between a manager's efforts and outputs in terms of
profitability are frequently more difficult to identify and
measure than is alluded to.
Allocative Efficiency – Can it really be achieved
• Critics counter that allocative efficiency is possible with public
enterprises, as competition is a result of market structure and
state policy not ownership.
• Deregulation, liberalisation and the establishment of market
competition are not essential or sufficient conditions for
privatisation programmes, though they may be linked to its
success (Jackson and Palmer, 1988).
• The fiscal effects of privatisation are misconceived, especially
the role of privatisation in reducing budget deficits by
eliminating financial subsidies and uneconomic activities (Adam
et al., 1992). Subsidies stem from budget policy rather than the
enterprises executing it (Ramaswamy, 1988):
• Subsidies could continue after privatisation, e.g. price support
to farmers. Also, when privatisation reduces budget support for
loss-making enterprises ascertaining liquidity needs is difficult:
governments must examine each case individually and tailor
remedial measures according to circumstances (Ramaswamy,
Privatisation Experience in Developed Countries– General
• Empirical research on the effects of privatisation in developed
countries is inconclusive.
• For example, Wright et al. (1993) found that a privatisation through
management buy-out had several positive impacts upon performance.
• Critical studies pointed out that privatisation policies have produced
massive transfers of public wealth into private hands. Some
• Shaoul‟s (1997) study of the UK privatised water industry found: whilst
water privatisation yielded no efficiency gains, workers lost jobs,
consumer prices rose, and infrastructure deteriorated. She concludes
that „„while the government‟s case for privatisation rested upon
efficiency and benefits for all, the real effects of privatisation was the
redistribution of wealth to the new owners.‟‟(p.500-01).
• Arnold and Cooper (1999) reported: “The UK government received
only £13.1 million in cash proceeds for a port that was resold 18
months later for £103.7 million. The managing directors of the
management buy-out team and banking interests that financed the
buy-out were the major beneficiaries of the privatisation. Medway‟s
chief executive, personally made £12 million on the resale of Medway
Ports, nearly as much as the £13.1 million the Treasury collected from
the privatisation” (p.145).
Privatisation Experience – General Findings
• Empirical research on the effects of privatisation in LDCs is also
inconclusive (Cook and Kirkpatrick, 1995).
• Some studies have found that SOEs have lower profitability than their
private sector counterparts in the same industry (Ayub and Hegstod, 1986;
Killick, 1983; Kim, 1981; Funkhouser and MacAvoy, 1979)
• But other studies have found the public sector to be more efficient
(Ramaswamy, 1988; Wortzel and Wortzel, 1989).
• Potts (1995) examined denationalisation and production efficiency in
Tanzania finding improved, effective and innovative management after
privatisation in two states but in others organisational effectiveness declined.
• Weiss (1995) found no significant evidence that SOEs had inferior
performance to private enterprises.
• Karatas's (1995) comparative evaluation of pre- and post-privatisation
company performance based on financial measures such as turnover, profit
margins, and productivity. He found it difficult to demonstrate that
privatisation impacted upon performance.
Privatisation and Management
• Privatisation/ownership changes assume the following:
- Superior management control including accounting will
- More transparent accounting and improved economic
performance will follow.
- Facilitate broader development goals such as
increased investment, GDP, productivity and
What is Superior Management
• Incentive based control
• Market driven budgets
• Politics free control
• Bureaucracy free control
• Managerial and employees‟ involvement in
• Transparent control system
• Proper accountability and responsibility for
managers and employees
Does The Superior Controls – Western Management Control
Techniques – Make any sense In LDCs?
• Asechemie (1997) argued profit to owners or concepts of wages are
irrelevant in Nigerian Society particularly in informal sector
• Wickramasinghe and Hoper (2002) argued Western management controls
are not conducive to local culture in Sri Lanka
• Perera (1989) argued that accounting including management accounting in
its current forms is inapplicable to LDCs largely due to differences in
business environments, ownership structures, users of accounting
information, and attitudes towards disclosure.
• Peasnell (1993) called for more research on „what accountants actually do‟
in Third World countries rather than imposing any ideas which developed in
• Perera (1975) takes an eclectic but deterministic perspective to a Sri
Lankan context portraying how the economic environment, namely, the
capital market, taxation, regulation of accounting, and accounting education
• Tsamenyi (1997) argued management controls are shaped by local culture
are ethnic conflicts in Ghana
Does The Superior Controls – Western Management
Control Techniques – Make any sense In LDCs?
• Velayutham and Perera (1996) cultural orientations are important in
shaping management controls.
• Japanese management controls are distinctly different than Western
management accounting techniques – target costing and kaizen
• Abdeen (1980)concluded that the Western management accounting
techniques are applicable in Syria.
• Chan and Lee (1997) found, to some extent, Western concepts of
controls are applicable in Chinese companies.
Does Superior Management Controls
emerge in Privatised Companies?
• Very few studies are conducted
• Some of the findings are as follows:
• Wickramasinghe (1996) argued the following:
– Reduction of bureaucracy
– Introduced modern private management control but without any success
– Could not solve the rural problem such absenteeism
• Uddin and Hopper (2002) argued the following:
– changes of ownership altered controls towards more commercial ends to a
– Production and marketing systems were improved and speeded up, partly
– Tighter work targets were imposed with effective monitoring.
– Private owners instituted ad hoc and arbitrary controls over employees
reinforced by punitive sanctions.
– The emergence of family controls
– Control hardly rely on proper incentive systems, transparent budgetary control
Does the new controls in privatised companies
Facilitate broader development goals
• Broader development goals include increased investment, GDP, productivity and
• Wickramasinghe (1997) did not find any improvement in profitability or productivity at
the enterprise level
• Martin, (1995) reported When Telmex, a telecommunication in Mexico, was
privatised, foreign buyers made gains of $12-billion in share values in the first year,
largely because tariffs increased so much: on the other hand „„the big losers are
consumers, worse off by $33-billion‟‟.
• Uddin and Hopper (2003) ( 13 privatised companies were studied) found the
– privatisation has not increased returns to society: privatised companies‟ contributions to state
revenue declined in real terms and as a proportion of value added.
– Transparent external reports failed to materialise as required by law and there was evidence
of untoward transactions affecting minority shareholders, creditors, and tax collecting
– Commercial profitability of the companies are more or less unknown due to lack of
– Employment did not increase rather decreased
Why Expected Management Controls (Western!)
are Different than the Actual Controls in Privatised
• Assumptions of Superior Management Controls (often lacking in less
– Market-based strategies,
– pricing and resource allocation decisions;
– Detachment of state activities from enterprise management;
– Relatively efficient capital markets able to sanction managers pursuing
– A transparent, well-enforced structure of accountability and regulation;
– Relatively unconstrained capital rationing;
– Employees who base decision-making on organisational criteria rather
than personal or political considerations
• Different cultural values
• Trade unions