Public Management and Administration - Owen E.hughes

Public Enterprise 103
when the contract comes up for renewal, and the system would still require
substantial government regulation. Political bargaining may become more
important in deciding who wins a franchise than genuine ‘arm’s-length’ contracts.
Where the advocates of privatization have a point is that, if a genuine
natural monopoly exists, it should not also need the protection of regulation. If
someone wants to start up a private power station, or sell power as a by-product
of industry, there should not be any government prohibition placed in their way.
According to another study of privatization in Britain, the biggest problems
there have occurred over the privatization of utilities. Criticisms centred around
the degree of regulation required after privatization (Vickers and Yarrow, 1988,
p. 428):
The problems of organization and control in utility industries such as telecommunications,
gas, electricity, and water are amongst the most difficult in the field of microeconomic
policy. Indeed, our view is that under public ownership there are conditions in
which they become so acute that public ownership is to be preferred. When there are massive
economies of scale and scope, high entry barriers, or externalities, private ownership
performs poorly. The incentive and opportunity to exploit consumers threatens allocative
efficiency, and the lack of competitive benchmarks leads to internal inefficiency and
slack. The fact that public ownership is also far from perfect in these circumstances
reflects the inherent difficulty of economic organization in such industries.
Privatization of utilities need not be ruled out, but there certainly should be far
more care taken than would be required in privatizing other parts of the public
enterprise sector. In the United Kingdom, privatization occurred throughout the
public utility sector with greater problems in that area than in others.
While it is necessary to concede that the United Kingdom was the first country
to set up a massive privatization programme, it was not necessarily an
exemplar of the process. The main reason to privatize should be to improve
economic efficiency, both narrowly within the organization and more widely to
improve the functioning of the economy for those industries that rely on enterprise
services. If this was the aim in the United Kingdom, the policy failed. If
the aim was to maximize returns to the Treasury perhaps it has not been a failure,
but consumers do not seem to be better off. Competition has been muted.
The former enterprises remain a political problem because of political sensitivity.
Gas and electricity companies were attacked for raising prices, increasing
executive salaries and making high profits at the same time as large
numbers of consumers were applying for assistance in paying their bills. The
privatization of British Gas is cited as ‘a textbook example of how not to privatize
a state monopoly. The creation of a huge, arrogant, inefficient and
exploitative private sector monopoly was a serious misjudgment on the part of
a government committed to competition’ (Wilks, 1999, p. 261).
Even after privatization governments cannot totally remove themselves from
the public utility sector for several reasons. First, utilities remain a matter of
political importance even when privatized. A utility is just that, something used