Assessing the performance of public enterprises: A public-choice approach

Recent advances in the theory of public enterprises have led to the development of criteria for assessing their performance. The underlying idea is to determine the best practice of a particular enterprise and assess other public enterprises in the same industry against that best practice. This article is critical of the best-practice-approach and offers an alternative public-choice-based procedure.The objectives assigned to the operation of public enterprises in the best-practice approach do not reflect the specific functions of public enterprises. On the contrary, they are general economic policy objectives derived from a general theory of economic policy based on normative welfare economics. The efficiency of public enterprises is then considered a policy objective. In terms of a public-choice perspective, however, efficiency is almost never in itself a policy objective of a public enterprise. It is unlikely (but not impossible) that we may find a public enterprise with essentially the same production function as an efficiently operated private enterprise. By their very nature, public enterprises are diverse and suited for the most diverse policy objectives. Therefore, performance indicators of a general kind (based on welfare economics) do not reflect the purpose of running a particular public enterprise. The best-practice approach is based on the attribution of policy objectives. A more satisfying analytical approach derives the policy objectives of a particular enterpise by means of a public-choice analysis of its observable behavior. This positive and empirical analysis can then yield those policy objectives against which the performance of the public institution can be assessed.The article has three main sections. The first offers a critical discussion of the existing literature on performance measurements, in particular the best-practice approach. The second suggests an alternative public choice theory of public enterprise behavior, and the third develops a stepwise procedure for assessing the performance of public enterprises in a public-choice analytical framework.