Transformation and future of public enterprises in continental Western Europe (1).

Author:Lane, Jan-Erik
 
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Abstract

This article recognizes that in Continental Western Europe public enterprises have recently gone through a quick revolution which has made them regional and even global players, particularly in infrastructure development and management. This is the outcome of institutional changes both within the enterprises and outside in the European Union framework of laws and regulations, on the one hand, and the rapid integration of the economies of the EU states, on the other. The response of public enterprises--the new public firms--to their incorporation as joint-stock companies and to deregulation has been to engage in oligopoly and related strategies in order to acquire market power and to stabilize their business environments. The outcome of these strategies is that the public firms have strengthened their market positions, increasing their discretion in relation to government and their capacity to cooperate in share alliances with private sector players across national borders. These changes have occurred with such a pace that they call for debate about the privatization of some of these giant firms. This debate must take serious account of the public mission of such firms.

Introduction

In the advanced economies of Continental Western Europe public enterprises have always been very important players. They have been strongly present in infrastructure, where the European solution to the problem of market failure was different from the American one. Thus, in Western Europe enterprises operating in infrastructure--including telecommunications, railroads, air transportation, water, sewerage and energy in its various forms--were created, socialized or nationalized and owned directly either by the national government or by regional and local governments. The contrasting American solution focusing on privately-owned utility companies under a public regulatory regime has only recently become a real alternative.

Public enterprises remain today of utmost importance in the economies of Western Europe (Lindblom, 1977; Short, 1984), but over the last 20 years their status and behavior have been radically changed. Their legal foundations and modes of operation contrast significantly with those of previous periods and, while the tension between public mission and business is still there, the trade-off is now struck quite differently. The economics of public enterprises now weigh much more heavily than do the politics.

The discussion here focuses on the key changes in organizational design and regulation, and raises important questions about how structures and strategies interact as governments continue to play an active role in the economy. Throughout, the term "public enterprise" is used to refer to the traditional types of government organization involved in business, and "public firm" for the enterprises transformed as steps were taken to introduce the internal market in the European Union and to deregulate (as well as re-regulate) infrastructure.

The reconstitution of "public enterprises" as "public firms" has resulted from a conscious choice of a different governance mechanism, namely the incorporated joint-stock company in which government is a key owner of equity (Thynne, 1994). These public firms develop specific strategies as a response to the competition regime under which they have had to operate since deregulation started in the EU. The aim of these strategies is to present the firms with market stability, but at the same time they cannot engage in traditional tactics to enhance monopoly power. The outcome is a situation where a few giant public firms compete, while also engaging in strategies to increase market share.

In a deregulated market with big firms, whether public or private, there will be a search for strategies that make all of them equal players: "like to like". Since private firms seek to maximize profit, public firms will do the same. There are various strategies that enhance profit maximization, and all players will use them: "like to like". Thus public firms in Western Europe engage in strategies that increase their market power and they use their capital as the key instrument in the oligopoly games that result from incorporation and deregulation.

The recent changes in the nature and environment of public firms create a similar business climate in all countries of Western Europe despite historical legacies. The internal market of the EU has been enlarged by means of new directives which concern infrastructure and require that all public and private firms operate on a level playing field. Thus, the changes have brought about a convergence in legal form and behavior.

The Old System

Historical Legacies

In a market economy the state is not an owner of many firms; it is more preoccupied with being the umpire of the market. But all advanced countries have known exceptions, with some favoring public enterprises as part of economic nationalism and others accepting them only when absolutely necessary. Infrastructure is one area where state involvement in one form or another has been defendable from an economic point of view. Another area is the war economy requiring the production of materials for defense: mining, steel, aeroplanes, tanks, and so on. In addition, governments have sometimes wished to set standards in firm management through the establishment of "excellent firms". In other cases, they have been forced to become the owner of large enterprises which would otherwise have gone into bankruptcy; but their aim with such "accidental ownership" has usually been to find quite quickly a new viable ownership structure in the private sector.

Some countries have adhered to an economic regime that deviates from the decentralized market economy. The command economy will not be examined here, but the interesting and often neglected point is that economic nationalism emphasizes the virtues of state ownership. According to the model of state-led economic development formulated by German economists in the 19th century, the state should own or support key industries. Traces of this model are found in the high numbers of public enterprises in countries like Austria, France and Italy. The French model is particularly interesting, as state-owned firms have long been considered to be the apex of the economy, setting the example for others to pursue. These enterprises have employed huge numbers of people.

Things have been different in countries which have adhered to the decentralized market model most consistently. Thus, employment in public enterprises has been very low in the United States. Somewhere in between the two extremes of the US and France are the other European countries which have employed public enterprises mainly for the provision of infrastructure.

Legal Position

Traditionally, the public enterprises used for infrastructural purposes operated as trading entities within the public sector under the control of a responsible ministry and with close links to the Ministry of Finance or Ministry of Trade and Commerce. They financed their operations by user fees in part, but governments regulated both quantities and price, as well as financed their often-occurring deficits. Their capital was part of the consolidated state budget.

There were various country specific arrangements for identifying particular enterprises and defining their conditions of operation, such that they ranged from having the status of a bureau to being bodies with some degree of autonomy. While a few were organized as joint stock companies (as private law entities), the rest had some form of public law recognition. In some cases, they were bodies established under special legislation and thus were examples of what is often called "statutory corporatization".

Basically, the enterprises operating in infrastructure domains were monopolies which were given their monopoly position under a scheme of regulation and were motivated with reference to the perceived needs of natural monopolies (Sherman, 1989). In Germany, for example, the "kommunale Daseinsfursorge" was the base of local economic activities and had constitutional recognition. This emphasis on the creation and maintenance of monopolies often led to economic activities in energy, water, transport, sewerage, and so on all being brought under the one enterprise structure.

The New System

With the creation of the EU internal market and competition requirements, as well as the increasing globalization of markets and capital, there was a perceived need in Western Europe to transform existing public enterprises into more modern public firms. The transformation had two key components: one involved their internal reconstitution as joint-stock companies; the other saw a change in the rules of the market through a process of deregulation and a related form of re-regulation. The combination of the two components has had major implications for public enterprise structures and behavior.

Internal Change: Incorporation as Joint-Stock Companies

The basic public firm model today is that of a joint-stock company. This legal form is now considered the natural choice for the management of government-in-business activities. Thus most public enterprises have been transformed into joint-stock companies in which government ownership may vary from a strong minority position to the possession of the total equity.

Incorporated public firms behave differently from the traditional public enterprises, as the institutions are different enough to allow for the elaboration of new strategies. It is in the interest of the key players to change their behavior when a public enterprise is transformed from the public law form to the private law form of a joint-stock company. The incentives of the owners, managers, employees and other stakeholders lead them to revise their strategies quite considerably.

The choice of the joint-stock company form is based on various factors that are often played out in a...

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