6 Privatization Deregulation CBA

7/27/2019 6 Privatization Deregulation CBA

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Transport Economics and ManagementPrivatization, deregulation and cost benefitanalysis

Eric Pels

[email protected]


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TEM2

This lecture

Privatization and deregulation

Cost benefit analysis

Learning objective: Be able to explain the reasons for

privatization and deregulation, and if these reasons arevalid in the transport sector. Be able to explain and

interpret the steps in cost benefit analysis.


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TEM3

Privatization and deregulation

Privatization Transfer of all or part of ownership of business

organizations from public to private sectors Deregulation

Loosening of government controls of an industry, enablingit to be increasingly directed by the free market

Political trend in last 2-3 decades

Neoliberal policy; Reagan and Thatcher administrations Laissez-fare approach: von Hayek; Chicago School of

Economics (Friedman)

Examples: energy, mail, rail, nodes (airports, ports),airlines etc.


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TEM4

Arguments in favor of

privatization/deregulation

Entrepreneurial spirit

Competition in capital markets

Elimination of political misuse

Erosion of crowding out Maximum to feasible investments in economy

Public

investments

Private investments

Maximum possible investments

Increased

governmentborrowingdiscouragesprivateborrowing(high interest)


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TEM5

Arguments in favor of


Widening of shareholdings and economic interest Increase populations interest in economy

Political motivation: shareholders positive towardsadministration

Employee ownership

Fiscal improvement Public funds

Revenues Tackling of unionization


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TEM6

Arguments against


Marginal cost pricing Public company more likely to set prices at marginal costs

Natural monopolies (next slide)

Safety concerns Regulation of British bus industry in 1930s due to

dangerous driving

Risk; accidents (external costs)

Control of externalities Redistribution if income and wealth

Subsidisation of services delivered to the poorer

Job protection

Share-ownership consolidation


7/35TEM7

Methodologies of privatization

Complete transfer of firm from public to private

sector by selling of shares

E.g. infrastructure operators; natural monopolies

Competitive tendering of constituent parts of

market

E.g. train services, bus services

Franchised monopolies

Bid with consumer price receives the license (P=MC)

Highest bid (lowest subsidy) receives the right

Service quality


8/35TEM8

Risk and failure

Political risk

Privatized company important to politicians Private firm can be less efficient if government will not

allow firm to fail

Does government commit to free market?

Policy risk: government fails to implement correct

policy Decision making: what do we want?

Funding

Regulation


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Example: FYRA

NS/KLM had highest (and

only) bid in

2001(148mln/year) Government workers

expected bid was too

high

Foreign competitors?

2004: AnsaldoBreda andAlstom propose bids to

deliver trains

AnsaldoBreda wins

Technical problems

TEM9 source: www.spits.nl

source: Vrij Nederland


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Cost-benefit analysis

source:

www.kennisbetuweroute.nl


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Project appraisal

Financial appraisal Evaluates project based on net gain

Economic appraisal/cost-benefit analysis Includes all costs and benefits to society

also external costs and benefits

Ex-ante: during decision making

In media res: during lifetime of project

Ex post: After decision is made and project is completed

Netherlands: OEI

(Overzicht Effecten Infrastructuur, Overview effects infrastructure)


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Cost-benefit analysis: methodology

Specify the options

Identify the impacts Predict total impacts over the lifetime of project

Monetise impacts

Discount the impacts to obtain present values

Conduct sensitivity analysis

Compare net present value of each project


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Specify the options

Alternatives (excluding regionalairports. Source: www.minvenw.nl


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Identify the impacts

Costs Flyvbjerg: power and rationality in decision making

Cantarelli et al. (2012) NL, 1980-2012: infrastructure costs on average 16.5% higher than planned (ranging

from -40% to 163%)

Psycological factors: enthousiasm

Political factors: high costs unacceptable

Benefits

Direct effects

Indirect effects

PM (hard to monetize) Political decision


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Direct effect infrastructure investment

Effect of a project accruing to the owner or operator ofthe infrastructure or user of the infrastructure, or an

external effect resulting from (the usage of) the

infrastructure

Indirect effects

Effects of infrastructure investment, not directly relatedto the project, but resulting from the direct effects

Often redistribution of direct effect

Owner, operator or user passes direct effect on to clients or

suppliers


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Identify the impacts: example

Direct effects airport investment

Users

Travel time and cost savings

Aviation side of airport activities

Airport operator, airlines, handlers

Non-aviation side of airport activities

Shops, restaurants, parking

Indirect effects Users pass direct effects on to customers or suppliers

E.g. lower prices for transport services

Changes in labour-, capital-, real estate markets

Can be negative: crowding-out


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Effects of project investments

Example

Input x used to produce y, sold at price r a units of x needed for y

Total need x=a*y, or y=x/a

Full competition

Average cost at minimum

Project investment

Input cheaper; ac decreases

E.g. runway or rail capacity, used by airlines or railroads

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Effect of input price change

x

p

x1x0

p0p1

Change in surplus:

0.5*(x0+x1)*(p0-p1)

(rule of half)


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Input x used to produce y, sold at price r

a units of x needed for y Total need x=a*y, or y=x/a

Cost savings: a*(p0-p1)

Assumption: full competition

Surplus change in y-market: 0.5*(y0+y1)*(r0-r1)

0.5*(x0/a+x1/a)* a*(p0-p1)

0.5*(x0+x1)*(p0-p1)

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Change in surplus in output market same as in

input market

y

r

y1y0

r0

r1

Change in surplus:

0.5*(y0+y1)*(r0-r1) =

0.5*(x0+x1)*(p0-p1)


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Effect of investment on economy measured by

change in surplus in input market Direct effects measure for indirect effects

Assumptions:

full competition

no substitution (a does not change when p changes)

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E.g. market power

Effects of investments

22x

p

x1x0

p0

p1

y

r

y1y0

r0r1

input (transport) market output (product) market

mr

mc1

mc0


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E.g. scale economies, market power

Effects of investments

23y

r

y0

r0

profits

mr

y

r

y1y0

r0r1

profits

mr

mc1

mc0

mc1

mc0


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CSx

CSy,y additional welfare effect:

CSy -CSx+y

difference between direct and indirect effect

Welfare effects

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TEM25


Direct effects vs. indirect effects

Price system is allocation method

Competitive economy: price equals marginal costs. No economies of scale

No external costs (unless reflected by equilibrium price)

No barriers to entry

No informational barriers

Market failure: direct effetcs indirect effects How important are indirect effects?

Difficult to measure: p.m.

Often double counting

Rule of thumb: 30% of direct effect.


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TEM26

Identify the impacts: double counting?

Direct effects vs. indirect effects

Ticket tax

Direct effects aviation sector

Catalytic demand effects (ICAO): off-airport expenditures directly

related to use of air travel (travel, tourism, freight business

activity)

Induced effects (ICAO): spending of income earned through

direct and catalytic effects, and tax spending.

Direct: 24%, catalytic: 29%, induced: 47%

Direct effect: -350 million, 70% (-245 million) for NL

Total effect (direct + indirect): -1458 million (-1020 million for NL)


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TEM27


Why are people looking for high indirect

effects?


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TEM28

Predict the total impacts over the life

time of the project

Infrastructure has economic life of many

decades Forecasting of effects

Lecture 1

Scenario analysis

Success of project depends critical factors

Economic development

Political development

Technological development


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TEM29

Monetize the impacts

Steps 2 and 3 list all effects in different units

E.g. Time savings/losses, accident risk,emissions etc.

Monetize effects

Non-marketed products:

Revealed preference

Stated preference

Abatement costs


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TEM30

Discount impacts to gain present values

Difficulty: social discount rate

0

0

1

1

n

t

t

t

n

t

t

t

CPV C

s

BPV B

s


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TEM31


t


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TEM32


Ministry of finance (NL, 1995): 4%

Germany 3%

France 6%

Denmark 7%

France 8%

EC 5% Current practice

Open to discussion

Why do people want a low discount rate?


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TEM33

Conduct sensitivity analysis

In all steps there is uncertainty

How do results vary with assumptions?


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TEM34

Compare net present value of each

alternative

Cost benefit analysis is a tool

Present values of net benefits PM items

Political decision


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Summary

Privatization/deregulation

Political process

Positive and negative effects

Cost-benefit analysis

Tool

Know what limitations are

Political decision

6 Privatization Deregulation CBA

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