The Influence of Corporatization Process on the Cost of Publicly Provided Local Utilities: Some Insights from Bus Transit Systems

This study investigates the effects of the corporatization process – i.e. the transformation of a municipal firm into a limited responsibility company – on the production costs of local public services whose ownership is maintained by the local government. To that purpose, we use information on a typical local utility such as the bus service provided by public transit systems in Italy, which experienced a change of the governance towards the corporation form during the 90’s and especially in the first years of 2000’s. A total cost function approach is applied to a sample of 33 local bus companies over the period 1993-2002, relying on a random effects estimation procedure. The results point to that, even if public ownership persists, the transformation of a municipal enterprise into an autonomous company – corresponding to the first stage of the corporatization of local utilites in Italy – or into a limited responsibility company exerts a reducing impact on the production costs. This evidence supports the theoretical argument that under corporatization effective incentive schemes can be put into place (Shleifer and Vishny, 1994; Hart et al., 1997) and therefore that considerable efficiency gains can occur also in such an intermediate stage preceding a privatization process.