Public sector business organisations in the UK - Business Environment

Public corporations are statutory bodies, incorporated (predominantly) by specialAct of Parliament and, like companies, they have a separate legal identity from the individuals who own them and run them. Under the statute setting up the corporation, reference is made to the powers, duties and responsibilities of the organization and to its relationship with the government department which oversees its operations.In the past these operations have ranged from providing a variety of national and international postal services (the Post Office), to the provision entertainment(the BBC), an energy source (British Coal) and a national rail network (British Rail).Where such provision involves the organisation in a considerable degree of direct contact with its customers, from whom it derives most of its revenue, the corporation tends to be called a ‘nationalized industry’. In reality, of course, the public corporation is the legal form through which the industry is both owned and run and every corporation is to some degree unique in structure as well as in functions.As organisations largely financed as well as owned by the state, public corporations are required to be publicly accountable and hence they invariably operate under the purview of a ‘sponsoring’ government department, the head of which(the Secretary of State) appoints a board of management to run the organisation.This board tends to exercise a considerable degree of autonomy in day-to-day decisions and operates largely free from political interference on most matters of a routine nature. The organisation’s strategic objectives, however, and important questions concerning reorganization or investment, would have to be agreed with the sponsoring department, as would the corporation’s performance targets and its external financing limits.The link between the corporation and its supervising ministry provides the means through which Parliament can oversee the work of the organisation and permits ordinaryMembers of Parliament to seek information and explanation through question time, through debates and through the select committee system. Additionally, under the Competition Act 1980, nationalized industries can be subject to investigation by the Competition Commission and this too presents opportunities for further parliamentary discussion and debate, as well as for government action.A further opportunity for public scrutiny comes from the establishment of industry specific Consumers’ or Consultative Councils, which consider complaints from customers and advise both the board and the department concerned of public attitudes to the organisation’s performance and to other aspects of its operations (e.g.pricing). In a number of cases, including British Rail before privatization, pressure on government from consumers and from other sources has resulted in the establishment of a ‘Customer's Charter’, under which the organisation agrees to provide a predetermined level of service or to give information and/or compensation where standards are not achieved. Developments of this kind are already spreading to other parts of the public sector and in future may be used as a means by which governments decide on the allocation of funds to public bodies, as well as providing a vehicle for monitoring organisational achievement.
It is interesting to note that mechanisms for public accountability and state regulation have been retained to some degree even where public utilities have been‘privatized’ (i.e. turned into public limited companies). Industries such as gas, electricity, water and telecommunications are watched over by newly created regulatory bodies which are designed to protect the interests of consumers, particularly with regard to pricing and the standard of service provided. Of gas, for example, which used to regulate British Gas, monitored gas supply charges to ensure that they reasonably reflected input costs and these charges could be altered by the ‘regulator’ if they were seen to be excessive. Similarly, in the case of non-gas services, such as maintenance, the legislation privatizing the industry only allowed prices to be raised to a prescribed maximum, to ensure that the organisation was not able to take full advantage of its monopoly power. The regulator of the gas market is now Of gem.
An additional source of government influence has come through its ownership of a ‘golden share’ in a privatized state industry which effectively gives the government a veto in certain vital areas of decision making. This national shareholding which is written into the privatization legislation tends to last for a number of years and can be used to protect a newly privatized business from a hostile takeover, particularly by foreign companies or individuals. Ultimately, however, the expectation is that this veto power will be relinquished and the organisation concerned will become subject to the full effects of the market a point exemplified by the government’s decision to allow Ford to take over Jaguar in 1990, having originally blocked a number of previous takeover bids.
The existence of a ‘golden share’ should not be equated with the decision by government to retain (or purchase) a significant proportion of issued shares in aprivatized (or already private) business organisation, whether as an investment and/or future source of revenue, or as a means of exerting influence in a particular industry or sector. Nor should it be confused with government schemes to attract private funds into existing state enterprises, by allowing them to achieve notional company status in order to overcome Treasury restrictions on borrowing imposed on public bodies. In the latter case, which often involves a limited share issue, government still retains full control of the organisation by owning all (or the vast majority) of the shares as in the case of Consignia (formerly known as the Post Office). In March 2001 Consignia was incorporated as a government-owned public company. This change in legal status allowed the company more freedom to borrow and invest in the business, to make acquisitions and to enter into joint ventures and to expand internationally. Since the last edition was published the nameConsignia has been dropped in favour of the original name.

Municipal enterprises
UK local authorities have a long history of involvement in business activity. In part this is a function of their role as central providers of public services (e.g. education, housing, roads, social services) and of their increasing involvement in supporting local economic development initiatives. But their activities have also traditionally involved the provision of a range of marketable goods and services, not required by law but provided voluntarily by a local authority and often in direct competition with the private sector (e.g. theatres, leisure services, museums). Usually such provision has taken place under the aegis of a local authority department which appoints staff who are answerable to the council and to its committees through the department’s chief officer and its elected head. Increasingly, though, local authorities are turning to other organisational arrangements including the establishment of companies and trusts in order to separate some of these activities from the rest of their responsibilities and to create a means through which private investment in the enterprise can occur.
One example of such a development can be seen in the case of local authority controlled airports which are normally the responsibility of a number of local authorities who run them through a joint board, representing the interests of the participating district councils (e.g. Manchester International Airport). Since theAirports Act 1986, local authorities with airports have been required to create a limited company in which their joint assets are vested and which appoints a board of directors to run the enterprise. Like other limited companies, the organisation can, if appropriate, seek private capital and must publish annual accounts, including a profit and loss statement. It can also be ‘privatized’ relatively easily if the local authorities involved decide to relinquish ownership (e.g. the former East MidlandsAirport now renamed Nottingham East Midlands Airport and part of the Manchester Airports Group).
Such developments, which have parallels in other parts of the public sector, can be seen to have had at least four benefits:

  1. They have provided a degree of autonomy from local authority control that is seen to be beneficial in a competitive trading environment.
  2. They have given access to market funds by the establishment of a legal structure that is not fully subject to central government restrictions on local authority borrowing.
  3. They helped local authority organisations to compete more effectively under the now defunct system of compulsory competitive tendering (CCT), by removing or reducing charges for departmental overheads that are applied under the normal arrangements.
  4. They have provided a vehicle for further private investment and for ultimateprivatization of the service.

Given these benefits and the current fashion for privatization, there is little doubt that they will become an increasing feature of municipal enterprise in the foreseeable future. That said, local authorities are restricted in their degree of ownership of companies following the passage of the 1990 Local Government and Housing Act.


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