How Does Corporatization Improve the Performance of Government Agencies? Lessons From the Restructuring of State-Owned Forest Agencies in Australia

Abstract

Corporatization, or the adoption of more business-like practices or governance arrangements by government agencies, has been shown to lead to improvements in performance. However, why corporatization leads to improved performance is not well understood. There are competing theories as to how corporatization may improve performance, but because of confounding factors empirical studies have difficulty in identifying causal relationships. We address these issues in our analysis of the corporatization of six Australian state forest agencies that took place in the past two decades, focusing on: (1) improvements in efficiency and (2) improved profitability or cost recovery. The results confirm that corporatization leads to enhanced commercial performance through improving clarity around business decisions and increasing the autonomy of managers. A key feature is the establishment of new governance arrangements and how they are implemented. Our results suggest that mechanisms such as the creation of an “independent” board of directors are important to create an “arm's length” relationship between the government and the new entity, thereby improving clarity in business decisions.

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