Understanding Corporatisation: How It Changes Public Services, and What We Can Do Better

I.         INTRODUCTION

This piece will examine the fundamentals of Corporatisation programs, why they cause negative public perceptions, and what we can do better to execute such programs.

Throughout history, the public sector has been known as an inferior provider of goods and services compared to the private sector. To justify this argument, the private sector proponents mention stifling political interference, bureaucracy, weaker internal controls, lower managerial accountability, poor cost management, under-utilisation of invested assets or resources, insufficient controls over the workforce, and lack of motivation to improve.

Governments have tried many institutional frameworks to address these deficiencies and improve public services. One is creating a hybrid organisation owned by the government but managed like a private business. The process of making this hybrid is called Corporatisation.

The Kingdom of Saudi Arabia is undergoing an extensive transformation program that is unprecedented and complex. As part of its Vision 2030, the Health Transformation Program is a testament to the nation’s commitment to reforming healthcare. With a focus on the well-being of its citizens, the program aims to establish a healthcare system that is more accessible, sustainable, and provides high-quality care. The program’s cornerstone is Corporatization. Since its inception in 2016, the program has achieved remarkable success with significant advancements in the healthcare sector. These accomplishments are a testament to ambitious, systematic, and well-directed reforms led by visionary and dedicated leadership.

II. HISTORICAL CONTEXT: PUBLIC OWNERSHIP / PRIVATE PARTNERSHIP

The concept and practice of public ownership and private management or the creation of arms-length state-owned entities are as old as the State itself.

From the First Persian Empire, the management of public services was dominated by state enterprises with varying independence from political rulers. These enterprises were run as ‘professional’ entities renowned for their ‘efficiencies.’

In the 17th century, Sweden began to ‘disaggregate the provision and production of public services.’ Soviets also established approximately 750,000 arms-length public enterprises. Communist China installed more than one million similar enterprises.

In the 19th century, widespread experiments were based on Municipal Socialism in Europe and the United States. The local authorities created new public service organisations as autonomous corporations. They set everything up as corporatised arms-length public entities, from utilities to schools to hospitals.

Even in Mussolini’s authoritarian and right-wing regime in Italy, he created the Institute for Industrial Reconstruction on similar principles.

Similarly, Hitler in Germany built an expanded range of new state-run public services to improve ‘the folk’ and boost general welfare.

III.         HOW DOES CORPORATISATION WORK?

There is no singular form of Corporatization or easy way to explain how it works. What is deemed a success or failure in one place or sector may be seen differently in another country or sector. This is not to abandon any notion of shared norms or objectives but to acknowledge the complexity and ambiguity around Corporatization in practice.

In most common forms, Corporatization is the creation of wholly government-owned and privately managed entities in the public sector. They typically have a separate legal status from other public service providers and a corporate structure and governance like publicly traded private sector companies, such as the Board of Directors.

Based on historical experiences, Corporatization has proved to be one of the most popular forms of government ownership. Currently, it makes up the bulk of the public sector in many Western European countries.

Corporations are mostly seen in water and electricity utilities. However, the practice extends to a more comprehensive range of goods and services, including airports, universities, hospitals, and transportation.

Therefore, it is essential to understand why governments set up these organisations and what the benefits of these organisations are.

So, let’s look into it with some more detail.

IV.         WHY DO GOVERNMENTS DO IT?

Before diving into it, first, it is essential to understand arms-length transactions. An arm’s length transaction shows a transaction between two independent parties in which both parties are acting in their interest. Both buyer and seller are independent, possess equal bargaining power, are not under pressure or duress from the opposing party, and work in their interest to attain the most beneficial deal.

Therefore, because both parties act independently and in their self-interest, an arm’s length transaction closely matches the fair market value of the consideration.

Corporatisation primarily aims to create arm ‘s-length enterprises with independent managers responsible solely for operating their immediate organisation.

They account for all costs and revenues as a stand-alone company. This ring-fencing—or gentrification, as it is often called—should create greater financial transparency, reduce political interference, and strengthen managerial accountability within relatively autonomous service entities.

It can also enhance agencies’ borrowing status and credit ratings, making them less encumbered with complex intra-governmental finances.

V.         WHY IS THE PUBLIC SKEPTICAL?

The benefits of corporatised entities are powerful and convincing. However, the public remains concerned and sceptical about these organisations.

I want to raise some of the significant concerns often received in the public domain.

First, Corporatization may be ‘public’ in nature. Still, the term “corporate” raises conflicting and complex questions about the meaning of the word ‘public’ and the State’s nature in delivering essential services.

Second,it is an ‘alternative to privatisation’ and a wolf in sheep’s clothing, offering a face of public ownership while progressing the neoliberal agenda by propagating market ideology, advancing corporate wealth accumulation, and privatising without the political and financial risks associated with direct private sector investments.

Third, the corporatised entities are vertical silos with protective barriers erected in the name of autonomy. They operate in isolation, even when they share the same building, equipment, and service in the same jurisdiction. The result is a rigid and waterproof organisation where management and leadership roles are appointed on a whim, based on someone’s gut feeling or because of their connections, not capability and merit.

Fourth, under ‘traditional’ and aggregated forms of welfarist public administration, they typically bring together infrastructure projects under horizontally organised public service departments. The State uses cross-subsidisation, where revenues from one service support non-revenue-generating services such as libraries or primary healthcare. But, with neoliberal marketisation, they have been legally and physically separated from one another, told not to ‘waste’ resources on other departments, contributing to a blinkered and short-term approach to service planning. Therefore, in the new system, the corporatised managers become disinclined to share resources, and the elected officials may need more power to demand their transfer.

Last, like religious converts, corporatised managers adopt overly zealous market-oriented styles, languages, and techniques. The trend towards performance-based salaries for senior managers and other similar incentives often leads to a change in management ethos, with a focus on short-term financial bottom lines, creating publicly owned and operated entities behaving like private companies, mimicking business discourse and practices, and establishing systems of competition that can serve to ‘hollow out’ the State. In the new environment, it increasingly sees consumers as ‘customers’ instead of ‘citizens,’ with services seen as commodities to be bought and sold like any other product on the market, dissociated from broader public goods.

VI.         CHALLENGES IN PRIVATISING PUBLIC HEALTH ASSETS

I want to discuss the challenges of privatising public healthcare entities in more detail. I think this should be considered and negotiated under the SP&A or Sale and purchase agreement.

We recognise that privately owned and ‘for-profit’ organisations have profit generation as a primary motive. They depend on private capital and are expected to generate a return on investment in profits and dividends. Public critics of “for profit” ownership of health care providers highlight several downsides to pursuing profits.

Here are some examples:

First, private owners can Withdraw/close/sell up hospitals and clinics purely for financial reasons without considering the impact on the local population and its health.

Second, ‘cherry-picking’ the more profitable patients, i.e., those requiring the lowest treatment costs relative to the price paid by the payer, deterring or turning away less profitable patients, leaving them to travel longer distances to get care at other providers.

Third, ‘supplier-induced demand system’ if service payment is based on a per unit of service/activity delivered.

Fourth, ‘shifting costs’ onto patients and their carers for TV, telephones, and car parking for visitors and outpatients.

Fifth, it motivates companies to seek higher profits by employing lower-quality staff or/and paying staff less or by using fewer staff and making them cover more significant responsibilities.

Sixth, a ‘disincentive to incur costs’ which supports investment in community projects to improve disease prevention and education

VII.         HOW TO DO IT RIGHT?

Now, we have looked into some detail about the issues. The question about the management strategy to ‘do it right’ and address those concerns now arises.

My ten points to help progress the corporatisation arrangement into a more robust institutional framework are as follows.

First, the title of corporatised agencies or companies can be more public friendly and called Public Service Vehicles or Public Service Companies, PSVs or PSCs, respectively; therefore, from the outset, it is clear the idea of these entities is a public benefit.

Second, the program management should ensure that the level of service, quality, and pricing is fair to different social groups.

Third, ensure that services are provided financially efficiently and that under-investment or aggressive cost-cutting is monitored to protect the long-term future.

Fourth, ensure that the overall quality of service is improving.

Fifth, legal or formal arrangements make the service providers accountable to the public.

Sixth, service providers’ operating mandates and service delivery decisions should be communicated to the public transparently.

Seventh, hire human resources on a merit and capability basis at fair salaries and adequate numbers to meet workplace demand. Top-down, embrace a culture of accountability.

Eighth, ensure the model is financially and politically sustainable by demonstrating sufficient financial resources for the continuity of service and support for the new entity at different levels of government.

Ninth, invest in coaching and mentoring programs for young and less experienced staff members to understand their ambitions and motivations and help them build a better future. Show your teams that you care!

Tenth, monitor and control all communications flow to avoid rumours and negative media coverage in the public domain.

VIII.         KEY TAKEAWAYS

1. Corporatisation has deep roots in public services development and management history.

2. Corporations are increasingly seen as a safe public option for service delivery because the public dislikes privatisation.

3. Corporatisation contributes to greater financial and managerial transparency, which can help provide fair and affordable services for all.

4. Corporatised entities can make raising capital domestically and internationally easier.

5. Corporatisation arrangements should enhance equity, transparency, accountability, and public ethos with performance metrics and must be evaluated.

6. Publicness of purpose should be central to decision-making with solid checks and balances on overzealous commercial decision-making.

7. Corporatisation is about erecting financial and managerial walls. Still, one understands that ring-fencing is only effective if some doors and windows encourage cooperation and communication and promote holistic planning.

8. Corporatisation arrangements be promoted and called Public Sector Companies (PSCs) or Public Service Vehicles (PSVs)

9.     Leadership and management appointments should be based on competence and merit with a mix of people from private and public sectors.

10.   Management should always maintain sight of fair service provision, financial efficiencies, and quality improvements.

11.   They make management accountable to the public and disclose mandates and policy decisions to the public transparently.

12. Establish coaching and mentoring programs to better understand human resources and develop them for the present and future.