carlo cambini a massimo filippini b massimiliano piacenza c davide vannoni c

The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities

Some Insights from Bus Transit Systems

Carlo Cambini a Massimo Filippini

b Massimiliano Piacenza c Davide Vannoni

c

a DISPEA – Polytechnic of Torino and HERMESb Dept. of Economics – University of Lugano and ETH Zurich

c Dept. of Economics and Public Finance – University of Torino and HERMES

XI Riunione Scientifica Annuale della XI Riunione Scientifica Annuale della Società Italiana degli Economisti dei TrasportiSocietà Italiana degli Economisti dei Trasporti

Trasporti, logistica e reti di imprese: competitività del sistema e Trasporti, logistica e reti di imprese: competitività del sistema e ricadute sui territori localiricadute sui territori locali

Trieste, 15 - 18 giugno 2009Trieste, 15 - 18 giugno 2009

SIET 2009 - TriesteSIET 2009 - Trieste

Hermes Research Group on LPT

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.

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


Roadmap 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



Literature review Ownership Managerial performance Efficiency

Most of the studies focus on the impact of ownership (private vs. state-owned) on managerial behaviour and firm’s 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) typicallyin the hand of decentralized governments (municipalities). However…



The Corporatization process During 90’s 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»



Aim of this paper 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 all firms owned by local governmentowned by local government but for some of them change of the change of the governance statusgovernance status from fully public-controlledfully public-controlled firm to LRCLRC…

… ideal natural experimentideal natural experiment to empirically investigate the effects of corporatization! private ownership is the only solution to manager-shareholder agency problems, or also a restructured restructured governance systemgovernance system can positively influence firm’s performancepositively influence firm’s performance even if public ownership persists?



A simple theoretical framework 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:1. provide the service ‘in house’, i.e. by hiring public employees which are paid a

fixed wage P (direct direct managementmanagement) 2. 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 firm’s performance (corporatizedcorporatized firm 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



LPU Corporatization in Italy In Italy LPU typically carried on by local municipalities with in-housein-house

arrangementsarrangements (from Giolitti Law in 1903 till the mid of 90’s). Even when a distinct business was created (Azienda Municipalizzata), it was subjected to the same standard administrative and accounting rulessame standard administrative and accounting rules provided for local governmentslocal governments

New regime established with Law 142/90: birth of the ‘special company’‘special company’ (Azienda Speciale), a particular type of firm still controlled by the local government but with more budgetary and operational autonomymore budgetary and operational autonomy

A more powerful reform in 1997 (Law 127/1997) incentives for local municipalities to transform special companies into LRCtransform 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-organizationInternal re-organization and incentives for LPU in (increasing) order:in-house in-house Azienda Municipalizzata Azienda Municipalizzata Azienda Speciale Azienda Speciale Spa Spa



Empirical strategy – the sample Analysis of the impact of LPU corporatization on firm’s efficiency relying

on a cost function estimationcost function estimation

10-year unbalanced panel of 33 Italian PTS including three governance three governance categoriescategories: • municipal company (Azienda MunicipalizzataAzienda Municipalizzata – strongly prevalent until 1995) • autonomous company (Azienda SpecialeAzienda Speciale – mainly in 1996-1999) • LRC (SpA corporationSpA corporation – mainly in 2000-2002)

Sample compositioncomposition by yearyear and governancegovernance form:


1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total nr.

Municipal company 94% 82% 73% 52% 33% 33% 21% 20% 20% 10% 133

Autonomous company 3% 15% 24% 42% 61% 61% 67% 50% 20% 20% 99

SpA corporation 3% 3% 3% 6% 6% 6% 12% 30% 60% 70% 29

Total number 33 33 33 33 33 33 33 10 10 10 261


Empirical strategy – cost model TranslogTranslog functional form (flexible underlying technology):

• CC total production costs (labour + capital + energy)• yy output (seat-kilometers)

• nn network size, ss average commercial speed (output characteristics)

• ppLL ppK K ppEE input prices (labour, capital, energy)

• DMIXDMIX dummy for PTS operating both in urban and intercity areas

• TT time trend (potential changes in the technology)


lnln lnln21

lnln21lnlnlnlnln

,,,

,,

,,,,,

0

ittTitMIXitAUitSPA

KLrsnyl E

ritlr

KLqKLr E

q

E

rrq

snymsnyl

ititlmKLr E

rritsitnity

E

TDMIXDAUDSPApp

lpp

pp

mlpp

snypC

it

it

it

it

it

it

it

it

it

it

2 binary indicators for governance typegovernance type: DAUDAU (autonomous company) and DSPADSPA (SpA corporation) approach followed by Filippini & Prioni (2003), Mizutani & Urukami (2003), Roy & Yvrande-Billon (2007) to assess the impact of ownership


Empirical strategy – cost model: summary statistics of the variables


Variables (unit of measurement) Mean St. dev. Min Max

Total production cost a (103 € ) 70,113 116,368 8,139 743,662

Seat-kilometers (106) 1,799 2,728 226 15,489

Network length (kms of routes) 1,448 1,177 64 5,135

Average speed (kms per hour of bus service) 20 6 10 33

Rolling stock (number of buses) 434 501 69 2,806

Workforce (number of employees) 1,305 2,096 151 13,344

Labor price (103 € per employee) 37.97 3.57 29.59 47.38

Energy price (€ per liter of diesel oil) 0.59 0.07 0.44 0.90

Capital price b (103 € per bus) 28.32 9.64 11.39 62.61

Mixed service c (% of 1) 0.54 0.50 0 1

Autonomous company (% of 1) 0.38 0.49 0 1

SpA corporation (% of 1) 0.11 0.31 0 1

a Sum of labour, energy and capital costs. b Capital cost is the sum of depreciation and materials and services expenses. c Dummy for bus companies providing both urban and intercity services.


Empirical strategy – estimation procedure

RandomRandom effects (GLS) model it = eit + ui where uui i iid N iid N(0,(0, uu

22)) is the firm-specificfirm-specific randomly distributed shock

Advantages over alternative alternative techniques

• FixedFixed effects (LSDV) estimation time-invarianttime-invariant regressors (e.g. DMIX) can not be includedcan not be included in the model Cameron & Trivedi (2005): coefficient estimates very impreciseestimates very imprecise if within within

variationvariation (over time) is dominated by between variationdominated by between variation (across firms)

• SURESURE (cost function + input-share equations) estimation on pooled data it does not take into account unobserved firm-specific heterogeneityfirm-specific heterogeneity



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

GLS estimation of the translog total cost function

*, **, *** Significantly different from zero at the 90%, 95%, 99% confidence level.

Regressor Parameter estimate Standard error

Constant 39.762*** (3.355)

ln y 0.842*** (0.025)

ln n 0.065** (0.030)

ln s -0.303*** (0.050)

ln pL 0.678*** (0.039)

ln pK 0.162*** (0.025)

DMIX -0.129** (0.052)

DAU -0.020** (0.009)

DSPA -0.037** (0.015)

T -0.011*** (0.002)

Log-Likelihood 489.425

e a 0.042

u 0.099

R 2 0.998


Empirical strategy – results: the influence of corporatization

negative and significant coefficientsnegative and significant coefficients estimated for DSPADSPA and DAUDAU PTS more independentmore independent from local government operate more more efficientlyefficiently wrt to PTS directly managed by public administration

evidence consistent with our theoreticaltheoretical framework based on Hart Hart et alet al. (1997). (1997) and HartHart (2003) (2003): transformationtransformation of a state-owned firm from municipal company to autonomous company or SpA corporation managerial effort and presumably presumably costs costs

SpASpA corporation stronger impactstronger impact (-4%-4%) than AUAU (-2%-2%): higher degree of freedom from the typical restrictionstypical restrictions imposed on government agencies as for personnel hiring and promotionpersonnel hiring and promotion, procurementprocurement, and long-term investment budgetary operationslong-term investment budgetary operations



Concluding remarks (1) in highly subsidizedhighly subsidized industries like PTS and other LPU, before a

government enterprise is privatised it typically goes through the intermediate stageintermediate stage of corporatization corporatization (Stiglitz, 2000)

to the best of our knowledge, the present paper is the first attemptfirst attempt to investigate the impact of the corporatization process on the cost of publicly provided local utilitiespublicly provided local utilities (PTS) relevant from both the policy and market efficiency perspectives

results supports theoreticaltheoretical 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



Concluding remarks (2) appealing issues for futurefuture research:

analysis of the combined effecteffect of incentive regulation incentive regulation (cost-plus vs. fixed-price contracts) and corporatization corporatization which instrument is more effective in costs?

efficiency gains from corporatization can be sustainedsustained during the years, without introducing a real privatizationreal privatization of LPU and the associated profit motivation?

richer richer and updatedupdated information on regulatory contracts and governance structure…


carlo cambini a massimo filippini b massimiliano piacenza c davide vannoni c

Documents

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