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Wednesday, November 05, 2003

Privatisation and Market Reforms

Another link to my Singapore friend and colleague, Eddie Lee. I like this piece because it questions received wisdom: the point is that received wisdom, when it becomes unthinking dogma is dangerous. Argentina is a living proof of this. Of course, in many cases deregulation and privatisation can be enormously beneficial. But if the process is applied unthinkingly, or if it is simply the transfer of a state monopoly to a private one, then it is much more problematic. It goes without saying that a regulation ridden and corrupt public sector alternative is no alternative at all. However, as Eddie says, markets do fail, and not only occasionally. This seems to be the most misunderstood part of the story.

Privatisation can harm the public good
By Eddie Lee

LAST week, the re-nationalised owner of the British railway system, Network Rail, announced that it would cancel private sector contracts for the maintenance of its 32,000km network. The decision followed a series of fatal train crashes, which spurred concern that safety standards were being overlooked in the company's rush for profits. From breakdowns of railways to power blackouts such as those that happened in the United States, there's a rethink worldwide on how best to deliver public services. In the United Kingdom, the performance of rail companies has deteriorated, with 20 per cent of trains running late and passenger complaints up by 8 per cent over the past year. Ironically, the big companies were the worst performers: South West Trains notched up a 275 per cent increase in delays, measured in total passenger time, last year. And despite the dismal service record, some train fares were raised by more than twice the rate of inflation earlier this year.

The British rail privatisation experience is significant because it was symbolic of the many privatisations first championed by then prime minister Margaret Thatcher. A number of public services which were earlier thought to be 'natural monopolies' were privatised and subjected to market forces, in the belief that this would result in lower prices and improved service.But so far, not many people think that has happened.

Here's Britain's story.

British Rail was sold in 1996 with the following plan: passenger trains were to be run by 25 Train Operating Companies on franchises, while the railway signalling, tracks, bridges and stations were to be handled by a private company - Railtrack. But Railtrack went bust because attempts to raise profitability backfired. Reductions in expenditure on maintenance and repair led to an increase in accidents and delays that proved costly as the company was fined by the Rail Regulator and also had to compensate train operators for each delayed train.

Investigations into the fatal Hatfield train crash on Oct 17, 2000, and into two other rail accidents revealed that the number of Railtrack workers had fallen by over 60,000 from 159,000 in 1992, even though the number of trains had increased. Railtrack went bankrupt last year, and was replaced with the government-controlled Network Rail. And it looks as though the London Underground could take a step back from privatisation as well. There are inklings that maintenance work may be moved slowly away from the private sector.

As for the subway operators, British transport expert Professor John Whitelegg notes that they now get more public subsidy, about 1.5 billion pounds (S$4.4 billion) a year, than British Rail got in its last few years of existence. Mr Richard Bowker, chairman of the Strategic Rail Authority, is worried about the growing financial frailty of some of the operators and aims to dramatically reduce the number of companies to a handful. What has happened in Britain is that private interest (trying to maximise company profits) ended up with a huge social cost (not just higher fares and delays, but also fatal accidents due to negligence).

In Singapore, Acting Health Minister Khaw Boon Wan expressed his concern over such a divergence of private and social interests when he rebuked hospitals recently for engaging in 'silly competition', and urged hospitals to save money for patients, rather than make more profits for themselves. The belief that public interest is best served by liberating enterprise from state intervention has shaped thinking for almost two decades. The California Energy Crisis of 2001 was one of the first rude awakenings. But even though economists have pointed out that the crisis was actually caused by the manipulation of market power, people still cling to the belief that deregulation reduces market power.

Last month, a report by the United Nations' Conference on Trade and Development asked whether market-led reforms adopted in many developing countries after the debt crisis of the early 1980s have strengthened the ability of these countries to withstand external shocks. The disappointment is deepest in Latin America, which ironically is where deregulation has gone furthest. But after initial success, privatisation has roused anger. Take the case of Argentina's privatisation of water and sanitation in 1993: Sewerage infrastructure development has not kept pace with water delivery expansion, due in part to the fact that water delivery is twice as profitable as sewage treatment. As a result, over 95 per cent of Buenos Aires' sewage continues to be dumped into the Rio del Plata.

So how to avert unnecessary crises from misguided privatisation projects? Professor Paul Krugman of the University of Princeton suggests critical analysis in place of blind faith in the market. This is especially so in the case of companies that also need to respond to shareholders' short-term interests. Markets do fail, and sometimes they fail spectacularly to provide for the public good. Unless private and social interests can be adequately matched, it's silly to sweep all problems under the carpet of competition. Transport Minister Yeo Cheow Tong says the Government's suggestion last week that SBS Transit could transfer the loss-making North-East Line to SMRT was a rethink, not a U-turn. Whatever it is, there's no shame in admitting a good decision. The next question is, should the problem be left solely to the market to resolve?
Source: Straits Times

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