UK: PRIVATE MAY NOT MAKE PERFECT. - Robert Heller considers the Post Office privatisation debacle and notes that the correlation between private ownership and management efficiency isn't proven.

Last Updated: 31 Aug 2010

Robert Heller considers the Post Office privatisation debacle and notes that the correlation between private ownership and management efficiency isn't proven.

Freedom to manage is what's important.

You could hardly present a stronger argument against state ownership than the fiasco over Post Office privatisation. If you want to sap morale and effectiveness in any business, especially one facing crucial competitive decisions, just agonise over whether or not to sell it, get management and staff thoroughly excited (in contradictory ways), expend copious time and energy on the proposal - and then abandon the whole idea.

The comparative performance of the state's sold-off holdings gives an equivocal answer - judged by a report from consultants London Economics, commissioned by anti-privateers: the postal workers' union. Their employer emerges honourably from the exercise, with productivity growth accelerating to 3.2% annually in 1989-1994.

That number is bettered only by BT among the sold-off family silver. The Royal Mail led this surge by embracing Total Quality Management, which started from accepting the realities of its own previous poor performance. Next-day delivery, an unacceptable 74.5% in 1989, was boosted to over 90% as chief executive Bill Cockburn and his managers undertook a strenuous programme of improvement and upheaval, aimed at nothing less than cultural transformation.

This beneficent process must surely have received some hard knocks from uncertainty, division and diversion of management caused by the privatisation issue. According to the London Economics findings, this is a red herring, anyway. Where privatised companies have improved performance (they haven't much), the spur has been competition rather than any new-found need to add shareholder value. Thus the nationalised British Airways had spectacular annual productivity rises of 7.9% over the 1970s, against only 2.7% in the 1980s.

You can argue endlessly about such comparisons, which are affected by market changes, choice of base and final year, and the metrics selected. The above figures measure total factor productivity. Whether measuring output against all inputs gives the appropriate answer in all cases is debatable. But one conclusion is beyond question: where monopolies or quasi-monopolies have been privatised, the regulators are the only restraint on profits - apart from management's own inefficiency.

If a clear correlation existed between private ownership and management efficiency, the case for privatisation would be overwhelming. But why should such a relationship exist?

The first main argument is highlighted by the Post Office mess: that political interference prevents managers from doing what they know to be right. Second,

The trouble here is that existing private businesses perform so unevenly under that same system. The Guardian Guide to the UK's Top Companies shows only 36 out of 150 managing to increase sales in each of the past five years. At the other, dark end of the spectrum, 20 companies had lower sales in the fifth year than the first. The report found some sinners reporting `falling earnings in at least three years, investment below depreciation in more than one year, negative retentions in at least three years'.

Compared to all that, even the pre-reform Post Office, with its awful one-year loss in 1975, looks not too bad. That loss galvanised top managers into seeking and winning better performance. In much the same way,

The shame carried a threat: without radical improvement, BT could not succeed in the booming world competition in telecommunications. Despite the severe morale and other difficulties that have accompanied its shrinkage - down from 232,000 employees to 148,000 since 1990 - BT has obviously improved. Higher technology has been crucial, but so has higher quality of management. Yet could this only have been accomplished under privatisation?

Much earlier than BT, the French telephone system was lifted from the Dark Ages into full modernisation, seemingly overnight. Behind corporate transformations lies the sudden determination of a leading group that bad is not good enough, that good is attainable and must be attained. Why successful change is stimulated in one company, but not others, remains a mystery: without freedom to manage, though, it can never happen.

That freedom can exist under any form of ownership. The Tory privatisers, weirdly enough, are opposed to giving the Post Office greater freedom, because success would prove that public enterprise works. What would be gained if the Post Office can't compete? If it can't, so all the evidence suggests, everybody loses.

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