The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Some Insights from Bus Transit Systems

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The Influence of Corporatization Process on the
Cost of Publicly Provided Local UtilitiesSome
Insights from Bus Transit Systems
XI Riunione Scientifica Annuale della Società
Italiana degli Economisti dei Trasporti Trasporti,
logistica e reti di imprese competitività del
sistema e ricadute sui territori locali Trieste,
15 - 18 giugno 2009

• Carlo Cambini a Massimo Filippini b
  Massimiliano Piacenza c Davide Vannoni c
• a DISPEA Polytechnic of Torino and HERMES
• b Dept. of Economics University of Lugano and
  ETH Zurich
• c Dept. of Economics and Public Finance
  University of Torino and HERMES

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Hermes Research Group on LPT
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• Abrate G., Piacenza M., Vannoni D. (2009) The
  Impact of Integrated Tariff Systems on Public
  Transport Demand Evidence from Italy, Regional
  Science and Urban Economics.
• Cambini C., Piacenza M., Vannoni D. (2007)
  Restructuring Public Transit Systems Evidence
  on Cost Properties and Optimal Network
  Configuration from Medium and Large-Sized
  Companies, The Review of Industrial
  Organization, 31, pp. 183-203.

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Roadmap
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• Ownership, managerial performance and efficiency
  (previous literature)
• Local public utilities (LPU) and corporatization
  process
• Theoretical framework (a snapshot)
• LPU corporatization in Italy
• Empirical strategy
• The sample (bus transit systems)
• Methodology (cost model and estimation procedure)
• Results (corporatization effects)
• Concluding remarks

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Literature review Ownership ? Managerial
performance ? Efficiency
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• Most of the studies focus on the impact of
  ownership (private vs. state-owned) on managerial
  behaviour and firms efficiency
• The bulk of the literature highlights positive
  effects of privatisation ? more effective
  managerial incentives and higher efficiency, both
  from theory (e.g. Laffont Tirole, 1991 JLEO
  Hart et al., 1997 QJE Shleifer, 1998 JEP) and
  empirical analysis (e.g. Cragg Dyck, 1999 RJE
  Meggison Netter, 2001 JEL Dewenter
  Malatesta, 2001 AER)
• Still, in public utilities at least in
  continental Europe private ownership is the
  exception rather than the rule
• Bortolotti Faccio (2008 RFS) at the end of
  2000 the governments were controlling more than
  60 of privatized firms (through full ownership
  or golden shares)
• Gupta (2005 JF) analysis of partial
  privatization effect ? better performance of
  mixed companies
• Limited recourse to privatization even more
  pronounced at local level
• all around Europe ownership of most of local
  public utilities (LPU) typically
• in the hand of decentralized governments
  (municipalities). However

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The Corporatization process
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• During 90s many state-owned LPU undertook
  relevant transformations in their internal
  organization aiming at improving productive
  performance ? corporatization (i.e. from
  municipal firm to Limited Responsibility Company)
• Corporatized company (Shleifer and Vishny, 1994
  QJE)
  hybrid governance form between fully public-owned
  and private firms
• Transfer of control rights from politicians to
  managers and introduction of potential (monetary
  and non monetary) incentives to higher
  cost-reducing effort
• As pointed out by Stiglitz (2000, p. 206)
• Typically, before a government enterprise is
  privatised, it goes through intermediate stage of
  corporatization. Most of the efficiency gains
  seem to occur in this stage, though there is
  controversy about why.
• Some argue that the freedom from government
  personnel, procurement, and budget restrictions
  is all that is required under corporatization,
  effective incentive schemes can be put into
  place

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Aim of this paper
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• Assess the impact of institutional changes
  affecting the internal organization of local
  utilities which continue to be owned (fully or
  through a majority share) by the State (local
  governments)
• Information from a sample of 33 Italian public
  transit systems (PTS) over the period 1993 -
  2002 during this time span all firms owned by
  local government but for some of them change of
  the governance status from fully
  public-controlled firm to LRC
• ideal natural experiment to empirically
  investigate the effects of corporatization! ?
  private ownership is the only solution to
  manager-shareholder agency problems, or also a
  restructured governance system can positively
  influence firms performance even if public
  ownership persists?

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A simple theoretical framework
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• We follow Hart et al. (1997 QJE) and Hart (2003
  EJ)
• A government wants a public service (e.g. local
  public transport) to be provided ? 2 options
• provide the service in house, i.e. by hiring
  public employees which are paid a fixed wage P
  (direct management)
• provide the service by a state-owned firm which
  is run independently by a public manager, who can
  ex post obtain some (monetary or non monetary)
  incentives according to firms performance
  (corporatized firm)
• Incomplete contract approach the manager is able
  (at least partly) to ex post renegotiate its
  payoff according to the net benefit implied by
  his effort choice
• Results (and testable hypothesis) effort level
  in presence of corporatized firm lower than first
  best, but higher than effort level of directly
  managed public-owned firm ? presumably cost
  efficiency higher in corporatized case

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LPU Corporatization in Italy
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• In Italy LPU typically carried on by local
  municipalities with in-house arrangements (from
  Giolitti Law in 1903 till the mid of 90s). Even
  when a distinct business was created (Azienda
  Municipalizzata), it was subjected to the same
  standard administrative and accounting rules
  provided for local governments
• New regime established with Law 142/90 birth of
  the special company (Azienda Speciale), a
  particular type of firm still controlled by the
  local government but with more budgetary and
  operational autonomy
• A more powerful reform in 1997 (Law 127/1997) ?
  incentives for local municipalities to transform
  special companies into LRC
• At the moment each local municipality can decide
  to manage its services through a publicly
  controlled firm (i.e. in-house) or through a LRC
  (SpA corporation)
• Internal re-organization and incentives for LPU
  in (increasing) order
• in-house ? Azienda Municipalizzata ? Azienda
  Speciale ? Spa

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Empirical strategy the sample
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• Analysis of the impact of LPU corporatization on
  firms efficiency relying on a cost function
  estimation
• 10-year unbalanced panel of 33 Italian PTS
  including three governance categories
• municipal company (Azienda Municipalizzata
  strongly prevalent until 1995)
• autonomous company (Azienda Speciale mainly in
  1996-1999)
• LRC (SpA corporation mainly in 2000-2002)
• Sample composition by year and governance form

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Empirical strategy cost model
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• Translog functional form (flexible underlying
  technology)
• C total production costs (labour capital
  energy)
• y output (seat-kilometers)
• n network size, s average commercial speed
  (output characteristics)
• pL pK pE input prices (labour, capital, energy)
• DMIX dummy for PTS operating both in urban and
  intercity areas
• T time trend (potential changes in the
  technology)

• 2 binary indicators for governance type DAU
  (autonomous company) and DSPA (SpA corporation) ?
  approach followed by Filippini Prioni (2003),
  Mizutani Urukami (2003), Roy Yvrande-Billon
  (2007) to assess the impact of ownership

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Empirical strategy cost model summary
statistics of the variables
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni
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Empirical strategy estimation procedure
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• Random effects (GLS) model
• ?it eit ui where ui ? iid N(0, ?u2) is the
  firm-specific randomly distributed shock
• Advantages over alternative techniques
• Fixed effects (LSDV) estimation
• ? time-invariant regressors (e.g. DMIX) can not
  be included in the model
• ? Cameron Trivedi (2005) coefficient
  estimates very imprecise if within variation
  (over time) is dominated by between variation
  (across firms)
• SURE (cost function input-share equations)
  estimation on pooled data
• ? it does not take into account unobserved
  firm-specific heterogeneity

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Empirical strategy results
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni
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Empirical strategy results the influence of
corporatization
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• negative and significant coefficients estimated
  for DSPA and DAU ? PTS more independent from
  local government operate more efficiently wrt to
  PTS directly managed by public administration
• evidence consistent with our theoretical
  framework based on Hart et al. (1997) and Hart
  (2003) transformation of a state-owned firm
  from municipal company to autonomous company or
  SpA corporation ? ? managerial effort and
  presumably ? costs
• SpA corporation stronger impact (-4) than AU
  (-2) higher degree of freedom from the typical
  restrictions imposed on government agencies as
  for personnel hiring and promotion, procurement,
  and long-term investment budgetary operations

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Concluding remarks (1)
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• in highly subsidized industries like PTS and
  other LPU, before a government enterprise is
  privatised it typically goes through the
  intermediate stage of corporatization (Stiglitz,
  2000)
• to the best of our knowledge, the present paper
  is the first attempt to investigate the impact of
  the corporatization process on the cost of
  publicly provided local utilities (PTS) ?
  relevant from both the policy and market
  efficiency perspectives
• results supports theoretical argument that under
  corporatization effective incentive schemes can
  be put into place (Shleifer Vishny, 1994 Hart
  et al., 1997) ? efficiency gains can occur also
  in this stage preceding a privatization process

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Concluding remarks (2)
The Influence of Corporatization Process on the
Cost of Publicly Provided Local Utilities
Cambini-Filippini-Piacenza-Vannoni

• appealing issues for future research
• ? analysis of the combined effect of incentive
  regulation (cost-plus vs. fixed-price contracts)
  and corporatization ? which instrument is more
  effective in ? costs?
• ? efficiency gains from corporatization can be
  sustained during the years, without introducing a
  real privatization of LPU and the associated
  profit motivation?
• richer and updated information on
  regulatory contracts and governance structure