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Define Privatisation

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					        Learning Objectives
• Define Privatisation
• Practical and Theoretical Background of
  Privatisation
• Privatisation Experience
• Privatisation and Improvements of
  Management Control and Performance
                       Define Privatisation?
•   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
    Kirkpatrick, 1988).
•   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
  companies.

• 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
            LDCs

• PUBLIC SECTOR FAILURE

• INTERNAL POLITICS

• EXTERNAL PRESSURE
PRIVATISATION ARGUMENTS –
   Theoretical Justifications
• 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
  competitive forces.
                   Agency Theory
• 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,
  1992).
• In an efficient capital market, failure to perform to potential
  leads to low share values making the company liable to hostile
  takeover bids.
• 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).
                    Allocative Efficiency
• Public enterprises are often created to improve income distribution and
  resource allocation within an economy through investment in modern
  technology.
• 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
  appropriate rewards.
• 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 –
       Theoretical Problems?
• Productive Efficiency Theories – Principal
  Agent Relationship
• Principal – Agent may be relevant for classical
  small firms but in the modern large limited
  liability corporation the property rights of owners
  are diluted.
• 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
  empirical validity.
• 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
  markets prevail.
• 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,
  Neu, 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
                through privatisation?

• 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,
  1988).
  Privatisation Experience in Developed Countries– General
                          Findings

• 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
  illustrations below:

• 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
                Control
• Privatisation/ownership changes assume the following:

  - Superior management control including accounting will
  materialise.

  - More transparent accounting and improved economic
  performance will follow.

  - Facilitate broader development goals such as
  increased investment, GDP, productivity and
  employment.
    What is Superior Management
              Control?
• Incentive based control
• Market driven budgets
• Politics free control
• Bureaucracy free control
• Managerial and employees‟ involvement in
  control
• 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
    Western Countries
•   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
    and training
•   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
  costing
• 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
       degree.
     – Production and marketing systems were improved and speeded up, partly
       through computerisation.
     – 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
       system
    Does the new controls in privatised companies
        Facilitate broader development goals
•   Broader development goals include increased investment, GDP, productivity and
    employment
•   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
    following:

     –   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
         institutions.
     –   Commercial profitability of the companies are more or less unknown due to lack of
         transparency
     –   Employment did not increase rather decreased
 Why Expected Management Controls (Western!)
are Different than the Actual Controls in Privatised
                    Companies?
• Assumptions of Superior Management Controls (often lacking in less
  developed countries):
    – Market-based strategies,
    – pricing and resource allocation decisions;
    – Detachment of state activities from enterprise management;
    – Relatively efficient capital markets able to sanction managers pursuing
      sub-optimal policies;
    – 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
• Politics
• Trade unions

				
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posted:9/21/2011
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