Do you still think all SOEs should be privatised?
The argument isn’t as black and white as it seems
The debate about whether State Owned Entities (SOEs) would do better as either partially or fully owned in the private sector, or not, will neither be settled by simple argument, nor will any particular solution be applicable across the board.
A critical section of the debate is the question of governance. In the public service, the rules and regulations to which SOEs are required to submit are onerous and complex, and often difficult to rationalise while maintaining a competitive position in the marketplace. In truth, I don’t think such rules were designed for businesses which are required to compete in open markets.Public service businesses, in the main, are meant to deliver goods and services to citizens that aren’t also performed by the private sector, primarily for one simple reason: public service enterprises do not have, as their central purpose, the maximisation of economic returns on shareholder capital.
In fact, the rules of governance applicable to SOEs are best suited to enterprises that are either monopolies or are required to provide essential services to citizens.In the case of monopolies it is obvious that procurement processes have to follow rules to avoid favour, prejudice or exploitation. It is also fair that the government has the right to set down qualifying criteria and follow strict process in order to ultimately contract with service providers that pass public scrutiny and comply with government policy. Whether rules always produce the desired result, though, is debatable. Sometimes rules do no more than define the gaps for the crooks.
Consider only one (important) criterion in the procurement of goods and services: price. It is not sufficient to award business on the basis of the lowest or highest price (depending on whether you’re buying or selling) without having first determined fair market value, which isn’t, I have found, always within that band. Market price is, by definition, right. It is right because it is the product of a competitive business environment, driven by such pure metrics as relative efficiency of production, cost effectiveness, economies of scale, product reliability, brand promise and that most basic of economic constructs, the intersection of supply and demand. No amount of regulatory imposition can overrule the sense of fairly determined prices in a competitive market.More and more SOEs find themselves operating in competitive environments, and balancing their socioeconomic mandates takes some effort. The tests for successful delivery of social imperatives can be vastly different from the tests for commercial success. These different criteria often require very different mindsets to manage. You have to flip-flop between focal points. It can be done, but you need to know which game you’re playing at any point in order to play within the rules, and win. A blurred mix of both simply won’t cut it, in either mandate.The real issue, though, in all facets of this debate, is common purpose – without it, no matter the rules, no matter the oversight, optimal outcomes will remain elusive. In fact, you’ll probably make a hash of it.
Common purpose between all stakeholders is a must. The more natural, the less forced the common cause, the more likely the consensus and achievement of a desired outcome. With unanimous common cause there is only one key performance indicator, and you either achieve it or you get dealt out of the game.
It is common cause that drives best decisions. It is common purpose that discovers best prices. It is common purpose that is the foundation of innovation, of entrepreneurial success. It is also common purpose that bears the burden of maintenance expenditure, long term investment and measured risk taking.Maximising the return on shareholders’ funds is a complex mixture of knowing when to harvest and knowing when to plant, but you sure as hell have to plant before you can hope to harvest. And then plant again, and some more, in order to grow.
The private sector doesn’t have as many rules, because it doesn’t need them. Everybody knows what has to be done to win. Everybody knows that deferred consumption is necessary for sustainability. In the private sector you get more time for long-term decisions to mature and bear fruit; there is no limitation to or expiry of the term of office of the firm.
If we are indeed to have any chance of untangling the dual mandates that govern so many of our SOEs, then we need to understand the differences, and then reach common cause on the end game.
Mark Barnes is CEO of the Post Office