Monday, 21 November 2011

More on asset sales

Over at Kiwiblog it is argued that
“Mixed ownership” will improve the SOEs performance:
This one can be debated for ever. My view is simple. If you look globally, on average private sector companies significantly out-perform state owned companies. Now let’s us be very clear about this. This does not mean every single private sector company does better than every single state owned company. Of course not. It doesn’t mean that no private sector company never fails and it doesn’t mean that all state owned companies fail. It also doesn’t mean that private sector companies out-perform public sector companies every minute of every day.
The first thing to note here is that the literature that shows that on average private firms out-perform SOEs is dominated by private firms which are controlled by their private shareholders and thus are not mixed ownership firms as the government means to set them up. That is, the private owners have at least 51% of the firm's shares. As to the evidence on the subject the following comes from the summary of chapter 4, ‘Empirical Evidence on Privatization’s Effectiveness in Nontransition Economies’, from William L. Megginson’s book The Financial Economics of Privatization, New York: Oxford University Press, 2005,
The 87 studies from nontransition economies discussed in this chapter offer at least limited support for the proposition that privatization is associated with improvements in the operating and financial performance of divested firms. Most of these studies offer strong support for this proposition, and only a handful document outright performance declines after privatization. Almost all studies that examine post-privatization changes in output, efficiency, profitability, capital investment spending, and leverage document significant increases in the first four measures and significant declines in leverage.
Secondly when you look at the performance of mixed ownership firms they don't do as well as fully privately owned firms. For example, Aidan Vinning and Anthony Boardman in "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises", Journal of Law and Economics vol. XXXII (April 1989) conclude 'The results provide evidence that after controlling for a wide variety of factors, large industrial MEs [mixed enterprises] and SOEs perform substantially worse than similar PCs [private corporations].' So fully private firms out-perform mixed ownership firms.

The basic problem is that partial government ownership politicises the firm. Full privatisation is the better option.

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