Section 8.2 of the text points out some of the problems of defining public enterprise. Most definitions concentrate on two basic factors – the absence of exchangeable private property rights in the resources of an enterprise, and the production of output which is marketed. In order to understand the difficulties inherent even in this definition consider the following question.
A country decides to change its method of financing education. Assume that up to the present time schools have been provided by the state and that no fees have been charged to students or their parents. School buildings have been owned by the state and teachers have been paid out of general taxation. Under the new system several competing education corporations, licensed by the state, will be established with general responsibilities and objectives laid down by this licence and enforced by a central Department of Education. Students will pay fees to the corporation whose school they attend but they will be given help from the state in the form of a voucher.
Were schools under the original system part of the public enterprise sector?
Under the new system do schools satisfy the criteria for classification as public enterprises?
If corporations received capitation payments from the government according to attendance at their schools rather than from the students themselves, would this alter their status?
Would your view of the situation change if instead of licensing schools the state made them self-governing non-profit making bodies with the assets vested in a Board of Governors?
We note in Section 8.5 that managerial constraints in a public limited company (plc) and in a public corporation were different. There are, however, many more types of institutional structure than just these two. In Module 3 we discussed the regulated plc, and in Module 7 the production of services within a bureaucracy. Production may also be organised in partnerships or non-profit enterprises.
For each of the six institutional forms mentioned above, consider the role of the following constraints and place the enterprises in order from 1 (most tightly constrained) to 6 (least or not at all constrained).
Monitoring of performance by owners or representatives of owners.
Capital market constraints and the take-over threat.
The bankruptcy constraint.
The managerial labour market.
Competition in the product market.
As with Question 3.4 the exercise is intended to clarify your thinking about managerial constraints and not to produce an objectively correct ranking.
The use of efficiency targets requires the development of measures which do not distort management decisions or in other ways give misleading impressions of changes in productive or technical efficiency. Figures of output per person concentrate on labour input alone and do not take account of other factors. A more comprehensive measure has therefore been developed called total factor productivity. This attempts to measure changes in output relative to changes in the total volume of inputs used. As with any quantity index this measure requires that the individual components of the index are ‘weighted’ according to some criterion of importance. In this case the weights applied to the various inputs usually represent their share in total costs at some base period. These measures of efficiency can produce quite startlingly different results as the following question illustrates.
| Annual trend percentage changes | ||
| Total factor | ||
| Corporation | Output per head | productivity |
| British Rail | 3.9 | 2.8 |
| British Steel | 12.6 | 2.9 |
| Post Office | 2.3 | 1.9 |
| British Telecom | 5.8 | 0.5 |
| British Coal | 4.4 | 0.0 |
| Electricity | 3.9 | 1.4 |
| British Gas | 3.8 | 1.2 |
| National Bus | 2.1 | 0.1 |
| British Airways | 6.6 | 4.8 |
| UK manufacturing | 3.0 | – |
Source: Molyneux and Thompson (1987) Table 3.
Consider Table 8.5 which gives trends in productivity in UK public enterprises between 1978 and 1985.
Productivity growth measured in terms of output per head is in every case higher than the growth of total factor productivity. What are the common circumstances in which this result will occur?
The difference between growth in output per head and growth in total factor productivity varies quite widely. What factors will contribute to these differences?
How might changes in the nature of the ‘output’ affect our interpretation of these figures? Consider specifically the cases of telecommunications, electricity generation and buses.
