World Bank Documentdocuments.worldbank.org/curated/en/489511468764355318/...AIRLINES 1. Discussion...

37
1 90OG PSD Occasional PaperNo.27 September 1996 * .1 * * * _ 7 Privatization, Deregulation, and Competition A Survey of Effects on Economic Performance II John E. Kwoka, Jr. Professor of Economics, George Washington University * The World Bank . rPrivate Sector Development Department Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Transcript of World Bank Documentdocuments.worldbank.org/curated/en/489511468764355318/...AIRLINES 1. Discussion...

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1 90OGPSD Occasional Paper No. 27 September 1996

* .1 * * *

_ 7 Privatization, Deregulation,and Competition

A Survey of Effects on Economic Performance

II

John E. Kwoka, Jr.

Professor of Economics,George Washington University

* The World Bank. rPrivate Sector Development Department

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PRIVATE SECTOR DEVELOPMENT DEPARTMENT OCCASIONAL PAPERS

No. I Rhee, Katterbach, Belot, Bowring, Jun and Lee, Inducing Foreign Industrial Catalysis into Sub-Saharan Africa

No. 2 Mody and Wang, Explaining Industrial Growth in Coastal China: Economic Reform. ..and What Else?

No. 3 Biddle and Milor, Institutional Influences on Economic Policy in Turkey: A Three-Ir,dustry Comparison

No. 4 Lanjouw and Mody, Stimulating Innovation and the International Diffusion of Environmentally ResponsiveTechnology

No. 5 Tan and Batra, Technology and Industry Wage Differentials: Evidence from Three Leveloping Countries

No. 6 Navarro, Reversal of Fortune: The Ephemeral Success of Adjustment in Venezuela, ,'989-93

No. 7 Morales, Bolivia and the Slowdown of the Reform Process

No. 8 Ibrahim and Lofgren, Successful Adjustment and Declining Governance? The Case (f Egypt

No. 9 Tan and Batra, Enterprise Training in Developing Countries: Overview of Incidence. Determinants, andProductivity Outcomes

No. 10 Sundaram, Teik and Tan, Vision, Policy and Governance in Malaysia

No. 11 Tzannatos, Labor Policies and Regulatory Regimes

No. 12 Kessides and Willig, Competition and Regulation in the Railroad Industry

No. 13 Nagaoka, Antidumping Policy and Competition

No. 14 Atiyas, Bankruptcy Policy

No. 15 Brandao and Feder, Regulatory Policies and Reform: The Case of Land Markets

No. 16 Jebuni, Governance and Structural Adjustment in Ghana

No. 17 Atiyas, Uneven Governance and Fiscal Failure: The Adjustment Experience in Turkry

No. 18 Van Arkadie, Economic Strategy and Structural Adjustment in Tanzania

No. 19 Tan and Batra, Technical Efficiency of SMEs: Comparative Evidence from Developi.ig Economies

No. 20 Oi, Cadre Networks, Information Diffusion, and Market Production in Coastal Chinc

No. 21 Pasha, Governance and Fiscal Reform: A Study of Pakistan

No. 22 Frischtak, State Capture and Fiscal Adjustment in Brazil

No. 23 Biais and Malecot, Incentives and Efficiency in the Bankruptcy Process. The Case o,'France

No. 24 Safilidou, Cross-Country Survey of Telecommunications Regulatory Structures

No. 25 Gray (ed.), Industry Structure and Regulation in Infrastructure: A Cross-country Survey

No. 26 Khemani and Dutz, The Instruments of Competition Policy and their Relevance for Ewonomic Development

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Private Sector Development Department

Occasional Paper No. 27

Privatization, Deregulation, and Competition: A Surveyof Effects on Economic Performance

John E. Kwoka, Jr.

Professor of Economics, George Washington University

September 1996

While this paper has been cleared for inclusion in the occasional paper series by the Private Participation inInfrastructure Group, Private Sector Development Department, the views expressed are those of theauthor(s) and should not be attributed to the World Bank.

The World BankPrivate Sector Development Department

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¶1

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TABLE OF CONTENTS

1. Introduction ................. 11. Summary .12. Regime Changes: Some Preliminary Observations .13. This Report .3

2. Airlines .51. Discussion of Airlines .52. Table 1: Airlines .5

3. Trucking .71. Discussion of Trucking .72. Table 2: Trucking .7

4. Railroads .91. Discussion of Railroads .92. Table 3: Railroads .9

5. Local Transit .111. Discussion of Local Transit .12. Table 4: Local Transit .12

6. Transport Infrastructure .151. Discussion of Transport Infrastructure .152. Table 5: Transport Infrastructure .15

7. Telecommunications .............. 171. Discussion of Telecommunications .172. Table 6: Telecommunications . 18

8. Cable Television .191. Discussion of Cable Television .192. Table 7: Cable Television .19

9. Electric Power .211. Discussion of Electric Power .212. Table 8: Electric Power .21

10. Water .231. Discussion of Water Distribution .232. Table 9: Water Distribution .23

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11. Trash Collection ............................ 251. Discussion of Trash Collection .252. Table 10: Trash Collection .25

Bibliography ............................ 27

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1INTRODUCTION

1. Summary

Over the past twenty years, scores of countries in all regions and economic circumstanceshave experimented with or embraced policies of privatization, deregulation, and marketliberalization. Although the purposes of these policy changes differ in important details, mostare intended in some fashion to improve enterprise performance. This survey is a broadoverview of the economics literature that analyzes the performance effects of such regimechanges. It focuses on four important sectors of most countries' economy--transport,communications, energy, and local services--and reviews what is known about the impact onprice, cost, quality, innovation, and productivity. The results of this survey may be summarizedas follows:

e Deregulation is generally associated with efficiency gains and privatization often so.The magnitude of gains differs considerably from case to case, and even where there are overallgains, some economic agents may find themselves worse off.

* In the case of privatization, competition is an important--perhaps decisive--mediatingforce in bringing about the gains. Without competition and especially in the presence ofregulation, the enterprise performance may not improve on that of publicly owned firms.

* Both privatization and deregulation may involve short-term costs of adjustment.Accurate assessments of their overall impact must therefore take an appropriately long view.

* Service quality typically improves with deregulation and market liberalization.Privatization, particularly in the form of contracting out, does not by itself necessarily improvequality.

2. Regime Changes: Some Preliminary Observations

The changes in market regimes sweeping countries around the world have raised one keyquestion: To what degree have privatization, deregulation, and market liberalization improvedthe economic performance of enterprises? Of course, these regime changes often have purposesin addition to economic performance. Yet policies that fail to lower cost or price, improveproductivity or innovation, or enhance financing and investment opportunities are not likely to be

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2 Introduction

judged successful. In this report, we provide an overview of the burgeoning economic literaturethat evaluates the performance outcomes of privatization, deregulation, and market liberalization.

We begin by setting out the relevant definitions and distinctions. The term privatizationrefers to the shift from public to private provision of goods and services. The may beaccomplished through outright transfer of ownership of an enterprise to private investors throughasset sale, equity sale, or equity distribution. In each case this may be to a single owner, to thepublic at large, or to the enterprise's employees. Some would further cListinguish corporatizationof an enterprise--the transfer of control rights from political figures to professional managers--from the transfer of cash-flow rights that completes the process of privatization.

A less thorough-going type of privatization is illustrated by franchising and contractingout. Rather than converting publicly owned assets to private status, these involve privateprovision of goods and services according to government specification. Franchising typicallyimplies sale of the specified product directly to the public (for example, electric power or cabletelevision), while contracting out entails payment by the government to the private provider ofthe specified product to the public (trash collection). The wide variety of such techniques resultsfrom such issues as whether or not there is competitive bidding, whether or not the vendorsupplies all inputs, the extent of sunk costs, and the duration of the contract.

Deregulation in the present context denotes the withdrawal of government from adominant role in making or constraining major decisions by an enterprise. These decisions mayinclude profits, price level, price structure, service quality, entry, and investment. Short ofcomplete deregulation, many types of regulatory reform may limit the government's role andenhance decision-making prerogatives of the enterprise, even instilling market-like performanceincentives (hence the term "incentive regulation").

It should be noted that deregulation does not contemplate abandonment of economy-widestandards such as antitrust or environmental and safety regulations. And deregulation (like theregulation it replaces) presumes private ownership of assets and provision of services, sincepublic ownership would allow direct control over such decisions.

The term market liberalization refers to the existence or emergence of capable rivals inthe production of goods or services. The rival may already exist ("actual competition") or it maysimply be able to enter quickly and easily ("potential competition", ancl in the extreme, a"contestable market"). The rival may be publicly or privately owned, regulated or not, so thatcompetition should be understood as conceptually distinct from privatization and deregulation.Although liberalization is often implied by deregulation, the logical possibility of deregulating amonopoly illustrates the distinction between the two.

Liberalization and privatization can be seen as alternative techniques for achievingsimilar objectives. Liberalization entails product market competition and brings consumerpreferences to bear on producers. Producers are rewarded or penalized to the extent that they candeliver low-price, high-quality goods, which in turn requires attention to production costs and tonew products and processes. Privatization, by contrast, releases capital market pressures on the

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Introduction 3

enterprise. Investors seeking higher returns buy and hold shares in those firms that achieve bothprofit and growth, thereby rewarding managers that reduce costs and produce desirable products--but not necessarily rewarding those firms that lower price.

These observations suggest that liberalization is likely to lead to competitive pricing,which in turn requires attention to cost efficiency. Privatization per se enforces cost efficiencybut, absent competition, the effects on price are less clear.

3. This Report

This report consists of annotated bibliographies and brief discussions of what is knownabout the performance effects of regime changes in the transport, communications, energy, andlocal service industries of various countries. In all, ten specific industries are surveyed. Theseare airlines, trucking, railroads, local transit (primarily buses), transport infrastructure (airports,toll roads), telecommunications, cable television, electric power, water supply, and trashcollection. Given the voluminous nature of the literature, the following strategy has guided thesearch and this report:

First, an effort has been made to identify key summary articles of the literature on eachindustry.' Such summaries are especially useful in that they aggregate and interpret numerousother studies in a single source. A dozen such summaries in total will be listed and describedfirst in each table.2

Next, some specific studies are noted, either because they are more recent than the citedsurvey(s) or because they are particularly important in their evaluation of the issues. Whereappropriate, these are separated into studies that examine privatization vs. those analyzingderegulation. A total of about fifty specific studies together with perhaps another one hundredthat form the basis for the summaries constitute the foundation of this report.

Brief accompanying discussion on each sector synthesizes the findings of the studies and,to the extent possible, draws out any obvious further implications. Complete bibliographicreferences to all studies are provided at the end of this report.

Copies of the report can be obtained from Randee Schneiderman, (202) 473-0191.Questions about the paper should be addressed to the author, John E. Kwoka Jr., Department ofEconomics, George Washington University, Washington DC 20052,kwoka@ gwis2.circ.gwu.edu.

i There exist at least two recent studies of public vs. private ownership that are not industry-specific. Boardmanand Vining (1989) and Megginson et al (1994) examine dozens of companies in numerous industries and countries.Both report advantages to private ownership, but their samples are so non-discriminating and their methodology souncontrolled as to cast doubt on their conclusions.

2 The individual studies that comprise the summary are not separately identified, except as the next text paragraphprovides.

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2

AIRLINES

1. Discussion of Airlines

The airline industry was the first major industry to undergo deregulation in the UnitedStates and privatization elsewhere. It is perhaps the most thoroughly analyzed experience withboth.

The Winston assessment of US deregulation represents a widely accepted judgment aboutthe effects of deregulation, both for the US and other countries. Overall, fares declined and theaverage consumer has benefited enormously from deregulation and the forces of competition thatit unleashed. The variety of services offered is much greater than before, and the quality (asmeasured by flight frequency) has risen. But there have been losers as well: Not all fares havefallen, notably on shorter hauls and thinner routes (yet even this represents greater costefficiency). Increased travel restrictions, load factors, and travel time represent partial offset tooverall benefits. And more recently, prices may have begun increasing as markets have becomemore concentrated.

Airline privatization in various countries has resulted in a more mixed picture.Comparisons of publicly owned and private airlines in the UK-Europe and in Australia suggestsuperior performance by privately owned firms. Yet actual privatization of British Air has notresulted in a clearly or consistently superior record. Galal et al report some performanceimprovements after privatization of airlines in Malaysia and Mexico, but many aspects of theirperformance remain unchanged.

2. Table 1: Airlines

Study Findings

DEREGULATION:

Joskow and Rose (1989) SUMMARY of early literature indicates regulated fares and servicelevels too high.

Winston (1993) SUMMARY of literature to date suggests US fares declined, farevariation increased, service quality mixed: (flight frequency rose, butso has travel time and restrictions).

5

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6 Airlines

Study Findings

Graham, Kaplan, and Sibley Prices under U.S. deregulation lower where markets less(1986) concentrated, with low-cost entrants.

Morrison and Winston Travel time fell in smaller markets, rose in larger markets, with(1986) overall increase of 5%. Flight frequency up by 9% throughout.

Vickers and Yarrow (1989) Initial effects of deregulation of UK domestic routes modest butlargely favorable.

Borenstein (1992) Average price rose 4% less than cost between 1984 and 1990. Pricerose 5% more than costs on routes under 500 miles but fell 10% onlonger routes. Studies show concentration among incumbentsmatters.

Grimm and Milloy (1993) Deregulation of Australian airlines resulted in lower fares, morefrequent flights in 14 months.

Morrison and Winston Deregulation led to major consumer gains from lower fares, greater(1995) flight frequency; minor offset due to travel restrictions, load factors,

and travel time.

Yamauchi and Murakami Effects of deregulation in Japan on profit, price, and productivity(1995) differ by airline.

PRIVATIZATION:

Davies (1971,1977) Private Australian airline Ansett has more freight, passengers, andrevenue per employee than public Trans Australian.

Pryke (1986) Comparison of nationalized BA with private British Caledonianshows BA used capital less intensively, had lower labor productivity,but had lower load factor.

Vickers and Yarrow (1989) Significant productivity improvements for BA in two years prior toprivatization. Later effects obscured by external forces.

Galal et al (1994) Two major productivity increases for BA--first prior to privatization,second at time of BCal merger.

Privatization of Malaysian Airlines had little direct effect onproductivity or prices, but investment increased.

Aeromexico sale in bankruptcy led to rise in prices and laborproductivity and to break-even operation for two years, followed bylosses.

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3TRUCKING

1. Discussion of Trucking

Like airlines, the trucking industry involves small to medium-scale production units. Insuch a naturally fragmented sector, competition could be expected to bring prices and costsdown.

Winston's summary captures a majority opinion about the effects of US truckingderegulation. Average trucking rates appear to have declined, although that average masksconsiderable variation by industry segment. Truckload rates have declined the least, while less-than-truckload have fallen dramatically. Shipping times have fallen and reliability has risen, sothat quality-adjusted rates show clear improvement.

Evaluations of trucking productivity and costs under deregulation uniformly report gains,perhaps over 20 percent. At least one study (that by Ying), however, finds that costs actuallyrose in the initial year after deregulation. Since productivity grew more rapidly thereafter,adjustment costs of the deregulatory process itself appear to have been responsible.

2. Table 2: Trucking

Study Findings

DEREGULATION:

Winston (1993) SUMMARY of literature implies common carrier rates declined, costsdeclined, and service quality (time, reliability) improved.

Blair, Kaserman, and Florida intrastate trucking rates fell by 14% after deregulation.McClave (1986)

Boyer (1987) Increase in for-hire truck productivity of at least 4-13%

Winston et al (1990) Rates and costs declined, with biggest losses in less-than-truckloadl ________________________ part of industry.

Ying (1990) Translog cost function on 61 trucking firms implies 7.5% costincrease in first year after deregulation. Later cost savingsaccumulate to 23% within four years.

Ying and Keeler (1991) Rates for general freight declined 15-20% by 1983, 25-35% by 1985

7

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4

RAILROADS

1. Discussion of Railroads

Privatization and deregulation of railroads raise different issues since in many countriesand particular markets, the huge sunk costs associated with railroads result in markets that mayhave monopoly characteristics.

Winston summarizes a considerable literature on the US experience and concludes thatoverall rates may have fallen slightly after deregulation, while service quality improvedconsiderably. Others like Boyer and McFarland doubt that, arguing that US regulation alteredrate structure more than rate level. There is little dispute that deregulation has led to enormouschanges in rates for particular commodities and locations, as varying degrees of competition andcost pressures have come to bear. At least one study reports that the initial effects ofderegulation were adverse, with significant cost and rate increases.

Two studies of private versus public ownership cast light on the relative importance ofrole of competition in improving performance. Caves and Christensen's well-known article oncompeting Canadian railroads leads them to conclude that public ownership need not be inferior,at least not when it is subject to the same competitive forces that make private companiesefficient. An analogous conclusion emerges from a study of the corporatization of the NewZealand railroad.

2. Table 3: Railroads

Study Findings

DEREGULATION:

Winston (1993) SUMMARY of literature implies overall rates probably fell, withmuch variation by product and location. Service time and reliabilityimproved.

Boyer (1987) Most likely effect is that rates rose, by about 2%. Principal effect onrate structure.

9

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10 Railroads

Study Findings

MacDonald (1989) Deregulation led to changes in mode, changes in service quality,decline in rates by 18.5% from 1981-85 for grain transportation.Competition between railroads had significant effect.

McFarland (1989) Rates either slightly reduced, or unchanged. Productivity and servicequality increased substantially.

Winston et al (1990) Rail service much improved, average price slightly higher (e.g., lowerfor grain, higher for coal)

Wilson (1994) Initial effects varied widely by commodity, averaging a 10% increase.By 1988 deregulation significantly lowered almost all costs and rates,by average of 30%.

PRIVATIZATION:

Caves and Christensen Publicly-owned railroad achieved total factor productivity gains equal(1980) to those of competing private railroad in Canada. Effect attributed to

direct competition.

Duncan and Bollard (1992) Major improvements in productivity of New Zealand railroad less dueto corporatization than to competition from deregulated trucking.

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LOCAL TRANSIT

1. Discussion of Local Transit

There is extensive worldwide experience with privatization and deregulation of localtransit systems. This industry illustrates the effects of such regime changes in a small-scale,easy-entry setting, where service heterogeneity is important.

Most studies agree that deregulation improves efficiency. Vickers and Yarrow report thatin the UK experience with express coaches, however, there was little effect in the initial year ofderegulation and moreover that publicly owned firms proved capable of competing againstprivate entrants. There and elsewhere, service innovations in the form of diverse transit vehiclesappear to be fostered by deregulation.

The evidence also suggests that private ownership of transit companies is superior topublic provision, although the measured effect varies from quite modest to very substantial.Gomez-Ibanez interprets a number of studies as showing that competition is more important thanownership. As a privatization technique, contracting out is generally seen as lowering fares butless conducive to service innovation than open competition.

Two studies find that public ownership generates lower direct (farebox) revenues.Schmidt goes on to observe systematic prior differences between cities that choose public vs.private ownership. After controlling for these differences, he finds no remaining causal effect ofprivate ownership on costs or service.

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12 Local Transit

2. Table 4: Local Transit

Study Findings

DEREGULATION:

Pashigan (1976) Private US systems more efficient than publicly owned. Stateregulation less restrictive (resulting in highter profit) than localgovernment.

Cervero (1988) Review of taxi fare and entry deregulation for US cities largelyfavorable.

Vickers and Yarrow (1989) Deregulation of express coach and local bus service in UK had littleeffect in first year. Competitive bidding miore effective where tried.Publicly owned firms capable of competition against private entrants.

Gomez-Ibanez and Meyer Deregulation and privatization led to service innovations, e.g., diverse(1993) vehicles. Contracting out good for fare reductions but less conducive

to innovation.

Lawton-Smith (1995) Deregulation of UK bus service resulted in 42 percent cost reductionper mile, but fares constant or rising due to elimination of subsidies.

PRIVATIZATION:

Perry (1984) SUMMARY of studies of urban transit systems shows no simplecorrelation of efficiency and ownership: Six studies show privateownership better, 4 show public ownership, 3 find no difference.Public ownership associated with higher service levels, lowerrevenues.

Hilke (1992) SUMMARY of nine studies concludes private transit has 10%-60%lower costs than comparable public systems.

Feibel and Walters (1980) Private bus service in Calcutta, Istanbul, Bangkok, and other cities 40-50 percent less expensive. No evidence that safety or other aspect ofquality lower.

Perry and Babitsky (1986) Study of almost 250 transit systems shows strictly private systemsmarginally superior to other arrangements. Contract managedsystems no better than publicly owned.

Savas (1987) Review of 5 studies in US, UK, and Australia shows public provisioncosts 55-100% more than private, about 50-60% when contractsawarded by competitive bidding.

Gomez-Ibanez (1993) Contracting out in London led to 20% cost savings. In 7 US cities,savings averaged 31% (25% net of administration).

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Local Transit 13

Study Findings

Review of diverse experiences with privatization and liberalization:"Benefits depend critically on whether effective competition can beestablished." Otherwise, service quality can suffer and fares rise.

Schmidt (1995) Cities that select public vs. private ownership differ, so thatcomparisons may not reflect causation. With controls, finds littledifference in service or costs, but more revenue raised from fares, nottaxes, in private jurisdictions.

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6

TRANSPORT INFRASTRUCTURE

1. Discussion of Transport Infrastructure

Privatization of transport infrastructure has involved airports and roads in numerouscountries around the world. There are, however, few systematic performance comparisons,perhaps due to the unique nature of each such project.

Two examinations of the British Airports Authority after privatization found little or noperformance effects. Both authors speculated that a major reason was the absence of competitionfor BAA. Gomez-Ibanez and Meyer also reviewed what is known about private roadconstruction and operation. They report only one real performance comparison, which showed a23 percent cost savings from private ownership. Other experiences vary widely, with somebenefits from privatization in terms of construction, capital costs, or innovation in most cases.

2. Table 5: Transport Infrastructure

Study Findings

Hilke (1992) SUMMARY of three studies of airports and two of highways findsprivately owned systems are 21%-50% less expensive than publicprovision, often provided better service.

Vickers and Yarrow (1989) Conversion of British Airports Authority to private, regulated-monopoly status had little or no effect on performance.

Gomez-Ibanez and Meyer Privatization of BAA as monopoly entity over all major airports(1993) limited potential for competition.

In US, Albany, Los Angeles, and elsewhere considering privatization.

15

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16 Transport Infrastructure

Study Findings

Gomez-Ibanez and Meyer Private toll roads in France break even overall, but with cross-(1993) subsidies among routes: "Private companies probably can build and

operate roads more cheaply than public companies [though] principalevidence...comes from only one case." That case showed 10% costsaving due to better design, 13% due to productivity.

Spanish system partially toll, partially tax financed. Fewer routesprofitable.

Experiences in Malaysia, Indonesia, Thailand show some advantagesof private companies in raising capital.

Extensive construction program for private toll roads in Mexico.Difficulties with cost and traffic projections, high tolls, need forsubsidies.

Recent efforts in US (Virginia, 4 in California) are marginal tohighway system. "Public and private [real economic] costs appearroughly comparable," but "privatization does enhance innovation inselection, design, and operation of toll roads."

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7TELECOMMUNICATIONS

1. Discussion of Telecommunications

Telecommunications has undergone regulatory reform or privatization in most majorcountries at this point. Complete deregulation is impeded by the concern that some parts of theindustry may have monopoly properties or that there remain persistent advantages to theincumbent.

A summary of the US experience with deregulating long-distance telecommunications isprovided in Winston. He concludes that divestiture--the vertical separation of AT&T's longdistance operations from its local exchanges--together with looser regulation resulted in a modestdecline in overall rates, although two other studies find no such decline. Most agree that longdistance rates fell substantially while local rates rose, as both were brought into alignment withcosts. One study of state regulation finds prices lower where price caps and other forms ofincentive regulation are in place. Kwoka' s decomposition attributes a significant portion ofAT&T's productivity increase to growing competition and a significant portion of BT's to pricecap regulation plus privatization. Crandall reports an initial decline in AT&T's productivity dueto the costs of divestiture itself.

Privatizations in the UK, Mexico, and Japan have resulted in an ambiguous record.While two studies find little or no performance improvements after BT was privatized, onereports a rapid productivity gain and another notes some deterioration. Both Telemex and NTT,however, appear to have increased productivity after privatizations, perhaps substantially.

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18 Telecommunications

2. Table 6: Telecommunications

Study Findings

DEREGULATION:

Winston (1993) SUMMARY of literature shows modest decline in rates afterdivestiture, with looser regulation.

Mathios and Rogers (1989) Comparison of AT&T rates in different states suggests most rateslower under price cap regulation relative to tighter traditionalregulation.

Crandall (1991) Effect of divestiture on overall rates insignificant, although local ratesrose and long-distance fell. Growth in TFP increased steadily withcompetition, although divestiture was major offset in 1984-85.

Taylor and Taylor (1991) Lack of long-distance competition said to cause AT&T rates to fall byless than costs after 1984.

Kwoka (1993) Competition responsible for 17% of TFP growth by AT&T between1977-87. Initial effect of divestiture adve:rse due to transition costs.

Privatization (subject to price cap regulation) responsible for 22% orTFP growth by BT in 1984-87.

PRIVATIZATION:

Molyneux and Thompson Rapid gain in total factor productivity for British Telecom after(1987) privatization, but pricing effects mixed.

Foreman-Peck and Manning Cross-section comparison of productivity measures for BT vs. 5(1988) European carriers: "Privatization as such is apparently no panacea, as

yet.,,

Oniki, Oum, and Stevenson Decomposition of NTT's total factor productivity shows growth rate(1989) increased by 2.1-2.7% per year after announcement of plan to

privatize and allow entry.

Vickers and Yarrow (1989) Corporatization followed by privatization-with regulation initially ledto greater price variation, higher profits, q[uestionable service effects.

Galal et al (1994) No evidence that BT's productivity (or much else) altered byprivatization until 1990.

Telmex productivity, revenue, and profits rising rapidly. Prices haverisen as well.

Cave (1995) Weighted average real cost of all services has fallen by 40 percentsince BT privatization. Local exchange rates have risen while callingrates have declined.

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8

CABLE TELEVISION

1. Discussion of Cable Television

Cable television in the US will soon complete its second cycle of regulation andderegulation. Early regulation by municipalities took the form of franchise bidding, which wascriticized as subject to opportunistic behavior by cable operators. Studies by Zupan, however,find that these risks are offset by reputational effects and municipalities' own market power.

A small number of studies have examined the impact of price deregulation that tookeffect in 1986. While casual observation and some systematic data suggest that price rose,Winston concludes that quality-adjusted price declined as a result of a considerable increase inthe number of channels. Two other studies, however, come to a different conclusion. They findservice price (or cable share price) increased, even after controlling for quality change.

Other studies suggest that duopoly cable systems have significantly lowered priceswithout sacrificing quality. One study also finds lower prices by municipally-owned cablesystems, although there are no data quantifying subsidies or other advantages to publicownership.

2. Table 7: Cable Television

Study Findings

FRANCHISE BIDDING

Zupan (1989a, 1989b) Studies find few franchise non-renewals (as Williamson and otherspredict), but little evidence that incumbents exploit position. This dueto countervailing power by cities, plus operators' interest inmaintaining reputation.

DEREGULATION:

Winston (1993) SUMMARY of small literature suggests quality-adjusted pricedeclined.

19

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20 Cable Television

Jaffe and Kanter (1990) Event study shows share price increased by 7.5% with cablederegulation, except in large cities with broadcast competition.

Rubinovitz (1993) Deregulation responsible for 18% price increase (43% of totalincrease). Rest due to quality and cost changes.

COMPETITION ANDOWNERSHIP

| Emmons and Prager (1994) Cable rates significantly lower where duopoly operators exist andwhen municipality owns cable system. No differences in qualitymeasured by number of channels.

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9

ELECTRIC POWER

1. Discussion of Electric Power

The electric power industry worldwide illustrates every possible difference in and changeof regime--public and private ownership, monopoly and competition, plus vertical integrationand deintegrated firm structures. These differences offer considerable insight into the effects ofinterest.

The largest literature has examined public vs. private ownership, and most especially inthe US. Five of the cited articles review other studies and conclude (in the words of Atkinsonand Halvorsen) that they "more often contradicted than confirmed the hypothesis that privately-owned firms are more efficient." Peltzman was the first (of many) to observe that this might bedue to the inefficiencies of regulation that accompanied private ownership. He also claimed thatpublicly owned utilities benefited from various subsidies that artificially lowered their costs, buta number of other studies (including that by Kwoka) hold such other factors constant and stillfind public ownership associated with lower costs.

Evaluations of privatized--and separate--generation and distribution utilities in Chilereport increases in profits and productivity. Deintegration together with privatization andliberalization in the UK appears to have resulted in performance gains in the newly-competitivegeneration sector, but not in monopoly transmission and distribution. In the US the costefficiencies of integration appear considerable.

2. Table 8: Electric Power

Study Findings

Donahue (1989) SUMMARY of 6 studies: "No study even hints at superior privateefficiency." Three show public more cost efficient, others find nodifference.

Viscusi, Vernon, Harrington SUMMARY of literature reveals lower prices from publicly owned(1992) utilities, but evidence on efficiency is mixed

21

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22 Electric Power

Study Findings

Peters (1993) SUMMARY of about 20 studies: "Almost all of the econometricstudies of costs and comparative efficiency found either no significantdifferences between ownership types, or an actual advantage.. .in favorof non-profit firms."

Meyer (1975) Cost function study of 30 public and 30 private utilities in 1967-69showed significantly lower costs for public firms.

Peltzman (1981) Review of data show public firms have lower rates than private firmsfor all customer groups and rate classes.

Hayashi, Sevier, and Trapani Translog cost function estimated for 32 private and 22 utilities during(1985) 1965-80. Public firms had lower costs in 1960s due to capital cost

advantage, but differential reversed in later years.

Atkinson and Halvorsen Review of 6 studies of electricity: "More often contradicted than(1986) confirmed the hypothesis that privately-owned firms are more

efficient." Own study of 123 private and 30 public utilities findsequal cost (in)efficiency.

Galal et al (1994) Privatization (with subsequent regulation) of state-owned powergeneration company in Chile resulted in significant productivity,profit increases.

Regulated, publicly-owned distribution utility in Santiago increasedprofits after shifting to private ownership.

Robinson (1995) UK privatization resulted in huge manpower reductions by generatingcompanies, smaller reductions by regional distribution companies.Consumer prices (especially residential) rose until 1993, thenstabilized.

Yarrow (1995) Deintegration plus liberalization and privatization in UK resulted inrapid productivity gains in competitive generation sector, but not inregulated monopoly transmission, distributlion. Prices have risenrelative to costs.

Kwoka (1996) Cost, price, and demand model for 543 U.S. utilities finds price 3.2%less, cost an additional 2.9% less under public ownership relative toprivate, regulated firms.

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Please replace page 23 of

Privatization, Deregulation, and Competition - A survey of Effects on EconomicPerformance by John E. Kwoka, Jr., PSD Occasional Paper No. 27, September 1996

10

WATER

1. Discussion of Water Distribution

The mix of public and private ownership of water distribution utilities in the US hasallowed numerous performance comparisons. Donahue's summary of seven such studiesconcludes that there is "no tendency for private water utilities to be any more productive." Whilethe occasional study does show the contrary, the others cited largely support this proposition.

Privatization of water distribution in Buenos Aires appeared to improve service andquality, and lowered prices by 17%.

2. Table 9: Water Distribution

Study FindingsDonahue (1989) SIJMMARY of 7 studies: "No tendency for private water utilities

to be any more productive." Four show no cost difference. 2 findlower costs for public systems, 1 for a private system.

Crain and Zardkoohi (1978) Study of 24 private and 88 public firms in 38 states in 1970; Unitcosts of privately owned utilities significantly lower.

Bruggink (1982) Unit costs found to be 24 percent'lower for publicly owned firms.

Feigenbaum and Teeples Study of 57 private and 262 public systems show no significant(1983) costs differences.Teeples and Glyer (1987) Comparison of three model specifications on 119 Califomia

utilities shows ownership makes no difference in best model.

Bhattacharyya et al (1994) Study of 225 public and 32 private utilities in 1992. Publiclyowned utilities slightly more efficient, but have much widervariation in performance levels.

Idelovitch and Ringskog Casual evidence suggests improved service and product quality in(1995) first year after privatization of Buenos Aires water supply. Rates

decreased, initially by 27 percent and remained 13.5 percent lowerthereafter.

23

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11

TRASH COLLECTION

1. Discussion of Trash Collection

Trash collection is undertaken through both public and private arrangements in the USand throughout the world. Private provision itself varies between contracting-out and opencompetition, further enriching the comparisons.

Three summaries of studies--one covering just the US, the others for the US and othercountries--conclude that private bid contracting is cheapest, followed by public provision, andlast by open competition. Among the possible reasons for the latter is the loss of economies frommultiple suppliers with overlapping routes. This result appears to be replicated for four LatinAmerican cities, where the evidence also supports the superiority of bid contracting.

At least one study raises some methodological questions about this result, claiming thatthe choice of public vs. private provision is itself not random. Various specification changessuggest the usual result is not robust.

2. Table 10: Trash Collection

Study Findings

Millward (1986) SUMMARY of 6 studies of US, Canada, and Switzerland: All butone find private provision cheaper, on average about 20%.

Savas (1987) SUMMARY of 9 studies in US, Canada, Switzerland, and Japan:"Municipal collection is about 35 percent more costly than contractcollection." No evidence that service quality inferior.

Donahue (1989) SUMMARY of 7 studies concludes that private, bid contractors to amunicipality are cheapest, public agencies about 25% more costly,unrestricted competition most costly by 50%.

Stevens (1984) Private provision 42 percent cheaper in 20 Los Angeles-area cities,accounting for costs of monitoring suppliers. Quality comparable.

Teeples and Glyer (1987) Traditional model implies 40-50% cost difference but very sensitiveto specification. Argues ownership status depends on deliveryconditions, i.e., non-random, further confounding effects.

25

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26 Trash Collection

Bartone et al (1991) Higher labor and vehicle efficiency from franchise bidding/privateprovision in Buenos Aires, Caracas, Santiago, and Sao Paulo.

Sinha (1993) Comparison of privatized services in 16 West Malaysian jurisdictionsshows average efficiency increase of 49 percent, cost decrease of 32

l percent.

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BIBLIOGRAPHY

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Duncan, Ian and Alan Bollard. Corporatization and Privatization: Lessons Learned from NewZealand. Auckland: Oxford University Press, 1992.

Galal, Ahmed, Leroy Jones, Pankaj Tandon and Ingo Vogelsang. Welfare Consequences ofSelling Public Enterprises: A Summary. Washington, D.C.: The World Bank, 1994.

Gomez-Ibanez, Jose A. and John R. Meyer. Going Private: The International Experience withTransport Privatization. Washington, D.C.: The Brookings Institution, 1993.

Hilke, John. Competition in Government-Financed Services. New York: Quorum, 1992.

Idelovitch, Emanuel and Klas Ringskog. Private Sector Participation in Water Supply andSanitation in Latin America. Washington D.C.: The World Bank, 1995.

Kay, John, Colin Mayer and David Thompson. Privatization and Regulation: The UKExperience. Oxford: Clarendon Press, 1986.

Kwoka, John. Power Structure: Ownership, Integration, and Competition in the U.S. ElectricityIndustry. Boston: Kluwer, forthcoming.

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Savas, E.S. Privatization: The Key to Better Government. Chatham, New Jersey: ChathamHouse Publishers, Inc., 1987.

Vickers, John and George Yarrow. Privatization: An Economic Analysis. Cambridge, MA:MIT Press, 1989.

Viscusi, W. Kip, John M. Vernon and Joseph E. Harrington, Jr.. Economics of Regulation andAntitrust. Lexington, MA: D.C. Heath and Company, 1992.

27

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