Management Discretion and Political Interference in Municipal Enterprises. Evidence from Italian Utilities

The attention of scholars and policy-makers is shifting from full privatisation to alternative measures as a means to improve the efficiency of public services. This article focuses on three restructuring measures adopted by local governments: partial privatisation (without transfer of control rights), inter-municipal joint ventures, and the presence of outside directors on the Board. Divergent hypotheses on these measures have emerged from two economic theories, namely public choice and the agency perspective. An empirical analysis investigates the effects of restructuring processes on a sample of Italian municipal utilities. Partial privatisation has been shown to play a significant and positive role, while Board independence from management has a less significant influence. Multi-government utilities have been found to suffer from severe coordination costs, which are not outweighed by scale benefits. Our findings reveal that management discretion is a significant source of inefficiency in municipal enterprises.