Investment Planning and Arm's Length Control in a Nationalised Industry

Abstract

Applying a relatively decentralised system of control which would keep state-owned enterprises (SOE) at arm's length from ministerial departments has been a stated policy for many governments around the world. However, the specific controls typically used for implementing this policy have seldom been successful. The purpose of this paper is to review and evaluate certain of these controls, drawing upon the British system of arm's length control of nationalised industries. In order to delimit the problem the paper cuts across the government-SOE relationship from the perspective of investment planning. Using primary information from the capital investment process in a particular nationalised industry, the paper searches for evidence on whether and in what ways existing controls have not been successful. Three types of controls are investigated: (1) The economic and financial groundrules, which are supposed to simulate a competitive, business-style efficiency. These rules are often assumed to act as an “invisible hand,” limiting direct government control. (2) The direct investment review, in the framework of the wider public sector expenditure survey. In discussing the nature of this review the paper examines whether government approval of investment conforms to an incrementalist or “muddling through” model. It further considers the role for incremental methods in controlling SOE investment. (3) The attempt to use corporate planning as a control instrument. Evidence from internal control processes within the enterprise and in particular the review of investment by a Central Executive is used in order to evaluate the above controls. This serves to show the diffuse character of the planning process and the possibilities and limitations of using similar controls at the government level. Suggestions are put forward for strengthening these forms of control by modifying or reinforcing certain elements within the existing arm's length framework. The paper would be useful for evaulating the difficulties involved in establishing some form of orderlines and formalisation in government-SOE relationships. It shows some of the weaknesses associated with certain “technocratic” rules and solutions to public policy problems in this environment.