THE COMPARATIVE PERFORMANCE OF PUBLIC AND PRIVATE ENTERPRISES: THE CASE OF BRITISH PORTS.

Economic theory fails to provide unequivocal propositions on the issue of the relative efficiency of public vis-?-vis private enterprises. The argument for the superiority of private ownership may be advanced from the perspective of principal-agent theory. It is believed that the switch to private ownership, even with no change in the competitive environment, will improve cost efficiency because the change of ownership will sharpen managerial incentives and replace defective bureaucratic monitoring hierarchies with the capital market for corporate control. A number of economists (for instance, Vickers and Yarrow, 1989,andEstrinandP?rotin, 1991) have questioned the strength of this argument in favour of private ownership and suggest that principal-agent problems may also arise in the private sector as a result of capital market imperfections. Thus the question of the relative efficiency of alternative forms of ownership is an empirical one, and in this paper we offer evidence from the British port transport industry. The hypothesis that public enterprises are inherently less efficient than private enterprises has been subject to many empirical tests, but these have provided less informative results than might be expected (Ferguson and Ferguson, 1994, pp.211-14). Difficulties of comparative efficiency studies arise often because of data deficiencies. In many industries (for example, utility industries in the UK) there is simply no immediate domestic benchmark against which the performance of public enterprises can be assessed. In others, public enterprises coexist with their private counterparts, but the sample is not large enough to allow reliable inference. Even when the sample is large enough, valid efficiency comparisons between the public and private sectors are not always possible. One obvious problem is that public enterprises are often explicitly given wider social objectives, which may well result in, and at the same time provide an excuse for, poor productive performance. Another problem is that the existence of factors other than ownership is non-separable from ownership in many cases: these factors include market * London Guildhall University. This paper is based on a PhD thesis (Liu, 1992) pursued at Queen Mary and