What are the four types of Privatisation?

Royal Mail Video

• http://www.bbc.co.uk/news/business-24474047

Reasons for Privatisation• 1) CompetitionNationalised industries were monopolies that were allowed to dominate the market. Privatising meant dividing the market up to many firms. This competition would increase allocative efficiency and lower price.

2) Allows access to private capital • Government funds are limited• Privatisation allows firms to • get funds from the private

sector

Glyn as an academyCan now invest moreMoney in staff, projectors,Board pens…..

3) X- inefficiency

The profit motive creates incentives to cut costs and reduces the organisational slack in businesses.

“Stock Market Discipline.”

4) Revenue Raiser

• The Government earned £1.98bn from Privatising Royal Mail in October 2013.

1980s revenue raising allowed a cut in Income Tax and allowed businesses to increase spending.

5) Enterprise Culture

• Encouraged individuals to take pride in business and generating profit.

• It gave the public a vested interest in business which would counter the anticipated strike action.

6) Private sector specialism

• Private sector businesses are business specialists, so it makes sense to give them that role.

Reasons for Privatisation

• 1) Competition• 2) Allows access to private capital• 3) X- inefficiency • 4) Revenue Raiser• 5) Enterprise Culture

Reasons against Privatisation

• 1) Allocative and Productive Inefficiency – fall in

consumer welfare A privately run monopoly or Oligopoly will restrict output at the point of MC = MR.

Given the Natural Monopoly style characteristics of these utilities it is hard to create enough competition to lower prices and exploit economies of scale.

2) Strategically important industries

• Gas, Water, Railways, Coal, Electricity and Ports are Inelastic necessities with merit good characteristics.

Free market firms will ignore the social benefits

3) Closure of loss making services

4) Job losses

• Nationalised industries were X-inefficient because they employed too many overpaid unskilled workers.

• Part of the argument was that it is the government’s responsibility to keep employment high and wages not too low.

• Is it though? • Huge strikes and short run fall in production.

Infrastructure of railways - http://www.youtube.com/watch?v=Kejn5Gl_Atw

• http://www.youtube.com/watch?v=c6YvtJ0drcE&feature=PlayList&p=CFDFA5A5C9F4454E&playnext=1&playnext_from=PL&index=28

• 5mins – 7:30mins• 13 – 15:50• 17:30 - 19:00• 23: - SAFETY – THIS IS CRUCIAL/Freight now on

road – worse for environment 27:00

• People were obsessed with what would happen to the railways - http://www.youtube.com/watch?v=PBvUT5VFOAU&feature=related

• Stop at 3 mins

Economic Rationale for Privatisation

• Competition - on price and/or quality• Increase in efficiency• Innovation• Investment

Office of passenger rail franchising

Rolling Stock companies

Freight train operating companies

Train operating companies

Railtrack/ Network Rail

Office of the rail regulator

Train Operating Companies (e.g. SW Trains)

• 25 franchises were created which privately owned companies competed for ( e.g. a franchise running trains out of Waterloo throughout Surrey, Sussex and Hampshire)

• Each company would run a franchise for seven or eleven years after which they would be put for tender again.

• Chosen based on ability to provide the service for the smallest cost for the largest payout to the government.

How would we need to regulate the TOCS?

• Office of the Rail Regulator• Inelastic peak times regulated as there is huge

potential/incentive for TOCs to charge extortionate prices

• No need to regulate elastic (off peak) demand as there is lots of competition from other transport providers.

TOCs hugely regulated on price

• The Office of Passenger Rail franchising• Inelastic peak times regulated as there is huge

potential/incentive for TOCs to charge extortionate prices

• No need to regulate elastic (off peak) demand as there is lots of competition from other transport providers.

Rolling Stock Companies (ROSCOs)

• Three ROSCOS which own the existing stock and lease it out to several TOCS.

• Several ROSCOS bought their own stock (Virgin)

• These are not regulated as there is sufficient competition

Infrastructure

• RAILTRACK own the stations, land, buildings, signals and maintenance depots as an INDEPENDENTLY REGULATED NATURAL MONOPOLY.

• Disciplined by competition from its private shareholders ( to avoid X-inefficiency)

The office of the Rail Regulator • http://www.rail-reg.gov.uk/• Economic Regulation - prevent abuse of dominant position• Safety Regulation

• The granting, monitoring and enforcement of Rail track's network licence and the operator’s licence of the TOCs

Do we still need government Intervention?

• Externalities - Environmental Advantage of Rail- Cross Modal Congestion Impact

- Profit Maximising level of provision is not Welfare Maximising

Why was it Privatised in the first place?

• http://www.youtube.com/watch?v=40NVkfbaMo4&feature=related – wath first 4 mins