The perils of privatization

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Jose V. Romero

Jose V. Romero

As a result of the unpopular Meralco price hike that ugly word, collusion, has found its way into the front-pages. It refers to a possible coordination among the few power players to act in ways that materially affected market conditions resulting in higher power prices for consumers. The allegation is that the power firms may have come together to fix the rate.

This alleged collusion now under investigation by congressional committees may perhaps be in the forms of either explicit agreement or by tacit understanding.

Collusions are usually in the form of horizontal and vertical agreements as found in other countries. These agreements are among firms engaged in activities at the same stage of production and distribution and involve price-fixing or market-sharing arrangements. In our case this collusion may involve Malampaya and independent producers like Aboitiz et al and distributors like Meralco.

In Socialist and other left-leaning economies public utilities termed the network industries (electricity, gas, telecommunications, water, railways, postal service, etc.) important parts of which are natural monopolies have been targets of government intervention if not ownership. These governments use estate ownership or control of these industries to implement explicit or implicit industrial policies in which energy prices determine the competitiveness of manufacturing firms.


Direct control of natural monopolies
In this case the government assumes ownership of firms, setting them up as nationalized industries. The government thereupon appoints managers who set prices guided by their understanding of the national interest. Less socialistic governments allow private ownership but regulate the monopoly firm’s behavior.

In the eighties when countries like the UK and the US liberalized their economies under the so-called Washington Consensus, the UK privatized their nationalized industries—i.e., sold these to members of the public.

These happened in the telecommunications, transportation gas, water and electricity. As a safeguard however, the government dictated that these firms set prices equal to short-run marginal cost in an effort to maximize consumers’ welfare, which in economic theory, is called marginal cost pricing.

The worldwide movement toward privatization and deregulation is part of a growing belief among policy-makers that markets are more efficient allocators of resources than governments. This view has spread beyond the advanced industrial nations to most emerging economies who have tried heavy government intervention for decades and concluded that market determination is on balance superior.

Only a minority of economists, mostly in China, which still maintains State-Owned Enterprises or SOEs support public over private ownership in industries that can support several competing firms. Those who do, oppose most privatization, as politically incorrect. Some of these belong to welfare states.

There is however more disagreement among policy-makers over natural monopolies or public utilities such as gas and electricity, transportation and communication. Supporters of privatization argue that there are no natural monopolies in the very long run and that private ownership will encourage the technological dynamism that will erode the natural monopoly. They argue that in the short run, private firms can be prevented from charging monopoly prices by effective regulation.

Opponents of privatization argue that a privately owned monopoly will not be more technologically progressive and will behave more like a profit-maximizer than would a publicly owned firm. There are no clear winners in the debate. One thing sure is that the good or bad behavior of these firms depends largely on the managements of these publicly owned and privately owned firms and on the nature of the regulation to which they are subjected.

Restrictive practices
Government that have privatized nationalized industries continue to be wary of restrictive practices involved, such as agreements between firms over the prices they will charge or the way in which they will divide up the market in some way (by, perhaps, not competing in specific locations). In the United Kingdom natural monopolies must pass through ‘gateways’ to establish that they operate in the public interest. As mandated by the 1956 Restrictive Trades Practices Act natural monopolicies in the hands of the private sector must guarantee that consumers gain identified benefits from it and that the restrictive practice does not deter competition.

In this country which continues to lack a competition policy, it is obvious that privatization has led to an oligopolistic/oligopsonistic situation which is to say that our privatized public utilities are now in the hands of only a small group of service producers and sellers who can either be collusive or non-collusive. We will have to wait for the findings of investigative bodies in the government to determine this.

While it is true that the industries are under the supervision of regulatory bodies, this is no guarantee that these agencies and instrumentalities of government are immune from regulatory capture by the major players in the industry in connivance with its managers many of whom are political appointees of uncertain tenure. Suffice to say that given the high rate of power in this country compared to those of neighboring countries our dream of an industrial revolution that can propel this country into self-sustaining growth that can guarantee full employment and higher incomes seem rather hazy at the moment. Obviously there is an urgent need for an independent study group of experts to look at the situation and offer recommendations. What is clear is that more ‘gateways’ such as those enumerated in the restrictive act of the UK and anti-trust legislation in the US must be taken into account. This will determine a competition policy in this country which is long overdue.

An immediate policy problem is how to deal with the extreme forms of market dominance that are to be found in parts of this country’s network industries. In the energy sector encouraging competition in the supply of power is possible given bigger public or PPP investments.

In the UK and other countries which now have privatized utilities, the most frequent policy response has been to set up industry-specific regulatory agencies. In Britain their principal tasks can be summarized as ‘to promote competition where competition is feasible, and to impose price controls where monopoly is entrenched’.

There has, however, been a strong tendency for regulators to get involved in a wide range of aspects of decision making the industries concerned. In effect, regulators find themselves responsible and accountable for sectoral (industrial) policy decisions as well as for matters of competition and monopoly.

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