Public Management and Administration - Owen E.hughes

102 Public Management and Administration
increase the efficiency of the economy and achieve other social objectives should never
be confused with the proposition that, in the absence of effective regulatory structures,
privatization may do neither in practice.
Competition can provide benefits but the best way of introducing competition
is to deregulate the industry, rather than necessarily sell assets, unless deregulation
occurs at the same time as assets are sold. In this regard, the privatization
of Australian Airlines was carried out in a better way than many of the
privatizations in Britain. The Australian government would have received a
higher price if it had sold the airline with the two-airline agreement restricting
competition intact. By selling the airline after deregulation the beneficial
effects of competition were encouraged, with fares being reduced for consumers
and new players entering the market. In Britain there seemed to be little
or no benefit to the ordinary consumer from changing public monopolies
into private monopolies as was done in the first wave of privatization.
Preventing monopoly exploitation was once regarded as one of the main reasons
in favour of public ownership of enterprises but this reason is now less significant.
Advances in economic theory, particularly ‘contestable market
theory’, suggest that monopolies are constrained from being predatory by the
potential entry of competitors (Baumol, Panzar and Willig, 1982). They cannot
charge too much above reasonable prices because a competitor might appear.
If a monopolist is being constrained in this way, there is no need for government
intervention. In addition, even where there are genuine monopoly problems,
as in electricity and telecommunications, these may only occur in part of
an enterprise’s operations. Duplicating local telephone and electricity networks
is so expensive that these may be instances of natural monopoly. But electricity
generation is not a natural monopoly and neither is long-distance telecommunications,
so rather than keeping the entire enterprise in public hands, it is
argued that competitors should be allowed entry into those areas that can attract
competition. Even where local networks are too expensive to duplicate, it is
possible to franchise particular areas to private companies or to regulate so that
the network owner must provide access to competitors. The overall result is
that public enterprise may not be needed even for natural monopolies and even
if a private monopoly is created, its potential for abuse of monopoly power may
be no worse than the public monopoly it replaces.
This case is plausible but not incontrovertible. For a start, there are some
heroic assumptions in contestable market theory. It only works when there are
no ‘sunk costs’, that is, where a new investor will not lose money on plant and
equipment if the investment is unsuccessful. Such occasions will be rare, so the
potential for monopoly exploitation is not diminished. Having a private supplier
of utilities on the American model – private ownership with strict government
control over prices and services – provides no necessary efficiency
advantage over public provision. In addition, franchising a local network is more
difficult in practice than in theory. The successful bidder has clear advantages