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Carlo Cambini a Massimo Filippini b Massimiliano Piacenza c Davide Vannoni c

XI Riunione Scientifica Annuale della Società Italiana degli Economisti dei Trasporti Trasporti, logistica e reti di imprese: competitività del sistema e ricadute sui territori locali Trieste, 15 - 18 giugno 2009.

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Carlo Cambini a Massimo Filippini b Massimiliano Piacenza c Davide Vannoni c

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  1. XI Riunione Scientifica Annuale della Società Italiana degli Economisti dei Trasporti Trasporti, logistica e reti di imprese: competitività del sistema e ricadute sui territori locali Trieste, 15 - 18 giugno 2009 The Influence of Corporatization Process on the Cost of Publicly Provided Local UtilitiesSome Insights from Bus Transit Systems Carlo CambiniaMassimo FilippinibMassimiliano PiacenzacDavide Vannonic aDISPEA – Polytechnic of Torino and HERMES bDept. of Economics – University of Lugano and ETH Zurich cDept. of Economics and Public Finance – University of Torino and HERMES

  2. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni 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. SIET 2009 - Trieste

  3. 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 SIET 2009 - Trieste

  4. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Literature reviewOwnership  Managerial performance  Efficiency • Most of the studies focus on the impact of ownership (privatevs.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, 1998JEP) and empirical analysis (e.g. Cragg & Dyck, 1999RJE; Meggison & Netter, 2001JEL; Dewenter & Malatesta, 2001AER) • Still, in public utilities – at least in continental Europe – private ownership is the exception rather than the rule… • Bortolotti & Faccio (2008RFS): 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) typically in the hand of decentralized governments (municipalities). However… SIET 2009 - Trieste

  5. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni The Corporatization process • During 90’s many state-owned LPU undertook relevant transformations in their internal organization aiming atimproving 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» SIET 2009 - Trieste

  6. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni 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 owned by local government but for some of them change of the governance status from fully public-controlled firm to LRC… • … ideal natural experiment to empirically investigate the effects of corporatization!  private ownership is the only solution to manager-shareholder agency problems, or also a restructured governance system can positively influence firm’s performance even if public ownership persists? SIET 2009 - Trieste

  7. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni 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: • provide the service ‘in house’, i.e. by hiring public employees which are paid a fixed wage P (direct management) • 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 (corporatized 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 SIET 2009 - Trieste

  8. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni LPU Corporatization in Italy • In Italy LPU typically carried on by local municipalities with in-housearrangements (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 rules provided for local governments • New regime established with Law 142/90: birth of the ‘special company’ (Azienda Speciale), a particular type of firm still controlled by the local government but with more budgetary and operational autonomy • A more powerful reform in 1997 (Law 127/1997)  incentives for local municipalities to transform 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-organization and incentives for LPU in (increasing) order: in-house  Azienda Municipalizzata  Azienda Speciale  Spa SIET 2009 - Trieste

  9. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Empirical strategy – the sample • Analysis of the impact of LPU corporatization on firm’s efficiency relying on a cost function estimation • 10-year unbalanced panel of 33 Italian PTS including three governance categories: • municipal company (Azienda Municipalizzata– strongly prevalent until 1995) • autonomous company (Azienda Speciale– mainly in 1996-1999) • LRC (SpA corporation – mainly in 2000-2002) • Sample composition by year and governance form: SIET 2009 - Trieste

  10. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Empirical strategy – cost model • Translog functional form (flexible underlying technology): • Ctotal production costs (labour + capital + energy) • y output (seat-kilometers) • n network size, s average commercial speed (output characteristics) • pLpK pE input prices (labour, capital, energy) • DMIX dummy for PTS operating both in urban and intercity areas • Ttime trend (potential changes in the technology) • 2 binary indicators for governance type: DAU (autonomous company) and DSPA (SpA corporation) approach followed by Filippini & Prioni (2003), Mizutani & Urukami (2003), Roy & Yvrande-Billon (2007) to assess the impact of ownership SIET 2009 - Trieste

  11. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Empirical strategy – cost model: summary statistics of the variables SIET 2009 - Trieste

  12. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Empirical strategy – estimation procedure • Random effects (GLS) model • it = eit + ui where ui  iid N(0,u2) is the firm-specific randomly distributed shock • Advantages overalternative techniques • Fixed effects (LSDV) estimation  time-invariant regressors (e.g. DMIX) can not be included in the model  Cameron & Trivedi (2005): coefficient estimates very imprecise if within variation (over time) is dominated by between variation (across firms) • SURE (cost function + input-share equations) estimation on pooled data  it does not take into account unobserved firm-specific heterogeneity SIET 2009 - Trieste

  13. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Empirical strategy – results SIET 2009 - Trieste

  14. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Empirical strategy – results: the influence of corporatization • negative and significant coefficients estimated for DSPA and DAUPTS more independent from local government operate more efficiently wrt to PTS directly managed by public administration • evidence consistent with our theoretical framework based on Hart et al. (1997) and Hart (2003):transformation of a state-owned firm from municipal company to autonomous company or SpA corporation   managerial effort and presumably  costs • SpA corporationstronger impact (-4%) than AU (-2%): higher degree of freedom from the typical restrictions imposed on government agencies as for personnel hiring and promotion, procurement, and long-term investment budgetary operations SIET 2009 - Trieste

  15. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Concluding remarks (1) • in highly subsidized industries like PTS and other LPU, before a government enterprise is privatised it typically goes through the intermediate stage of corporatization (Stiglitz, 2000) • to the best of our knowledge, the present paper is the first attempt to investigate the impact of the corporatization process on the cost of publicly provided local utilities (PTS)  relevant from both the policy and market efficiency perspectives • results supports theoretical 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 SIET 2009 - Trieste

  16. The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities Cambini-Filippini-Piacenza-Vannoni Concluding remarks (2) • appealing issues for future research: analysis of the combined effect of incentive regulation (cost-plus vs. fixed-price contracts) and corporatization  which instrument is more effective in costs? efficiency gains from corporatization can be sustained during the years, without introducing a real privatization of LPU and the associated profit motivation? richer and updated information on regulatory contracts and governance structure… SIET 2009 - Trieste

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