Tuesday, May 16, 2023

Public ownership or regulatory reforms

I started doing research on the ownership and regulation of network utilities in the early 1990s. Then in 1995 I went to the European University Institute to do my PhD and in 2000 I defended my thesis on “Privatized Utilities: Regulatory Reform and Corporate Control,” which you can read here if you are interested. After that, I spent two years and a half in the Regulation Initiative of the London Business School.

I see that the debate around these issues has not lost interest, although today there are new issues like climate change. A key topic today, like then, is whether the nature of ownership (public or private) is crucial to obtain good social results, or these can be achieved with regulation, one that can coexist with several ownership models.

Since the XIXth century until today, there has been a lot of diversity in the ownership structure of network utilities over the world. Public intervention in these industries, given the presence of naturally monopolistic segments, is widely accepted. Several authors in the economics literature have addressed the comparative advantages and disadvantages of private regulated network utilities vs publicly owned ones. The debate is about how best to correct or alleviate a market failure (natural monopoly) or achieve other social objetives (such as universal access), while at the same time securing necessary investments and providing incentives for efficient operation.

Laffont & Tirole (in their classic 1993 book on regulation, ch. 17) criticized the conventional wisdom at the time about the advantages and disadvantages of public vs private regulated ownership. They argued that the disadvantages of i) absence of capital market monitoring, ii) soft budget constraints, iii) risk of expropriation of investments, iv) lack of precise objectives and v) presence of lobbying,  are not universal in, or exclusive of, full public ownership. Similarly, the advantages of i) consideration of social welfare objectives and ii) centralized control, can be attained with appropriate contracts or regulation keeping private ownership.

Instead, they proposed to focus the discussion in one particular trade-off that arises from asymmetric information and incomplete contracts. Namely, on the one hand private regulated firms suffer from the conflict of interest between shareholders and regulators. For instance, each principal fails to internalize the effect of contracting on the other principal and provides socially too few incentives for the firm’s insiders. On the other hand, the managers of a private regulated firm invest more in noncontractible investments because they are more likely to benefit from such investments. Public Enterprise managers are concerned that they will be forced to redeploy their investments to serve social goals such as containing unemployment, limiting exports, or promoting regional development. The authors concluded that “taken together, these two insights have ambiguous implications for the relative cost efficiency of the public and private sectors; theory alone is thus unlikely to be conclusive in this respect.”

David Newbery (1999), in another important book, surveyed the history of network utilities in several regions of the world, and concluded that there is not much difference in terms of performance between a publicly owned monopolistic utility and a privately owned regulated monopolistic utility. 

Similarly to Laffont and Tirole (1993), Newbery (1999) pointed out that both private and public sector owners delegate operations in a board and a managerial team, which enjoy a degree of discretion. Government intervention is generally less costly under public ownership, but a promise not to intervene may be more credible under private production and may have positive incentive effects. But achieving this credibility is not straightforward: “The real case for privatization  must be that it is easier to sustain eficient pricing under private ownership in the face of political and populist pressures, and that privatization will generate additional efficiency gains.”

The differences in performance may come more from changes in the industrial structure, especially when some segments of the value chain can be opened up to competition: “Privatizing public utilities is primarily about ownership rather than control, since utilities can face remarkabky similar regulation under public or private ownership. Liberalization, in contrast, subjects utilities to market forces; it can induce more dramatic changes in performance than privatization alone.”

Tirole (2016) in his post-Nobel prize book on “The Economics of the Common Good” goes beyond his statements in Laffont and Tirole (1993) to argue that ”the conception of the State has changed,” from one of Producer of goods and services through public corporations, to a modern one focused on fixing the rules of the game and correcting market failures. Modern public finance textbooks reflect this evolution. Early editions of these textbooks or handbooks had chapters on “pricing in public enterprises,” which have now become chapters on natural monopoly pricing, admitting that regulated firms may be owned by private investors. 

Private firms in regulated sectors may deliver positive social outcomes, but only if some conditions are in place, mainly regarding adequate regulation. But beyond the objective empirical evidence, there has been a “backlash” in the public opinion of many countries. The late historian Tony Judt, in his celebrated last book “Ill Fares the Land” captures the discontent with privatization also in Britain when he criticizes the business oriented mentality of the new operating companies. Although countries like Chile, the UK or Spain were among the ones that privatized more firms in the 1990s, three decades later the controversy about the ownership of network utilities, and of water operating companies especially, has not disappeared. In an article in the Financial Times just yesterday, the prestigious columnist Martin Wolf echoed this controversy, and mentioned the interesting proposals made by an important expert, Dieter Helm, who has suggested radical regulatory reforms that are not mainly based on a focus on ownership.

Saturday, May 6, 2023

Will God save the king?

I was shocked yesterday to hear the prestigious historian Simon Schama express in the BBC his optimism about the reign of Charles III. I have a higher opinion of the former than of the latter, and that enthusiasm improved (just a little bit) my opinion of the new King and worsened it of the scholar.

After watching parts of the coronation ceremony on TV, I tend to agree with Martin Kettle in The Guardian. I am not so sure that there is any opportunity for reform and modernisation without basically scrapping or at least radically downsizing the institution, but if any existed it has certainly been squandered. Kettle emphasizes the contradiction between the religious statements made in the ceremony and the fact that Britain is a diverse and multiethnic country –with probably a majority of atheists, like probably most European countries. 

The coronation of the new King can be criticized from other perspectives. Spending a big amount of public money on one of the richest families of the world is one of them. The Tax Justice Network issued a letter asking the new King to support its campaign for an elimination of the tax havens that populate the former British Empire, under the support of the British Government. Rachel Etter-Phoya has argued that “While Britain’s overseas aid has dwindled in recent years, unwinding the web of tax havens instead would help many governments fulfill the rights of their citizens. If we were to reverse the tax revenue losses caused by the UK spider’s web, there would be 36 million more people with access to basic sanitation, 18 million more people with access to basic drinking water, and almost seven million children could attend school for an extra year.” 

It is a good thing that the new monarch is concerned about climate change, and hopefully he can make a contribution to that cause, but that is no excuse to keep giving a political role to a medieval institution that is not based on merit or any democratic principle. That applies to any monarch. This one, in addition, is a symbol of an empire that was based on colonialism and slavery. Charles has expressed recently his willingness to cooperate in an investigation of his familily’s direct links with the slave trade. If he follows this to its inevitable conclusion, I don’t know what could be the moral justification for the continuation of the institution that he represents. 

In addition, in a world where people are becoming used to having a voice on everything and a vote on many things, it is increasingly awkward that electorates have to tolerate the lifestyles of the likes of Harry and Andrew Windsor.

On many issues, I am an anglophile, but on the monarchy, my view is that this is an extreme example of the many institutions that are remnants from a time of darkness and irrationality. There are certainly other examples. But I see them with the same discomfort that I feel with slavery, witch hunting and burning, or racial and gender discrimination.

The British Monarchy will try to find a role in post-Brexit times. But it was part of the narrative and the imperial mentality that made Brexit possible. But Brexit has failed. The British should extract all the logical implications and join all the others who want to live in a modern and secular world of equal rights and cooperation, where nationalist pre-democratic institutions like the monarchy are, at least, reduced to a symbolic and minimal role.