Refuted economic doctrines #2: The case for privatisation

by John Quiggin on January 5, 2009

This is the second in a planned series of posts assessing the implications of the global financial crisis for the economic ideas and policies that have been dominant for the past few decades. The large-scale privatisation of publicly-owned enterprises both in capitalist countries like the UK and Australia and in formerly communist countries after 1989 played a big role in promoting the kind of triumphalism that characterised much commentary about free-market capitalism in the 1990s and (to a somewhat lesser extent) in the years leading up to the crisis. How well do arguments for privatisation stand up in the light of the financial crisis.

The case for privatisation had two main elements. First, there was the fiscal argument for privatisation, namely, that governments could improve their financial position by selling government business enterprises. This argument assumed that privately owned firms would have higher levels of operating efficiency, and therefore that the value of those firms would be increased by privatisation. The second argument was a dynamic one, that the allocation of capital between alternative investments would be improved if governments were not involved in the process. Both of these arguments have been fatally undermined by the collapse of the efficient markets hypothesis.

The fiscal case for privatisation must be assessed on a case by case basis. It will always be true for example that if a public enterprise is operating at a loss, and can be sold off for a positive price with no strings attached, the government’s fiscal position will benefit from privatisation. Various early ventures in public ownership, such as the state butcher shops operated in Queensland in the 1920s (apparently a response to concerns about thumbs on scales) met this criterion, and there doesn’t seem to be much interest in repeating this experiment. However, for most recent privatisations in developed countries, the sale price has been less than any plausible estimate of the value of future earnings, discounted at the government bond rate. The fiscal case for privatisation therefore rests on the claim, derived from the efficient markets hypothesis, that the correct discount rate to use is one based on the private sector cost of capital and therefore dominated by the expected rate of return to equity capital.

The choice of discount rate makes a difference because the rate of return to equity has historically been much higher than the rate of interest on government bonds, a gap that can’t be explained by standard economic arguments about risk premiums. Although many explanations of this ‘equity premium puzzle’ have been offered, for present purposes they can be divided into two classes
(i) those which assume that the EMH is true, and imply that the equity premium is a correct reflection of economic risk, independent of equity markets
(ii) those in which the risk premium for equity reflects failures in equity markets that lead people to prefer holding bonds
In the light of the GFC and the events leading up to it, the case for explanations of type (ii) is overwhelmingly strong

The dynamic case for privatisation is based on the idea that the allocation of investment will be better undertaken by private firms than by government business enterprises. This claim in turn relies on the assumption that the evaluation of risk and returns undertaken by investment banks, with the assistance of ratings agencies, and the availability of sophisticated markets for derivatives like CDOs will be far superior than anything that could be obtained by, for example, using engineering calculations of the need for investment in various kinds of infrastructure, and seeking to implement the resulting investment plans on a co-ordinated basis. The GFC has shown that, for most of the past decade, market estimates of the relative riskiness and return of alternative investments have been entirely unrelated to related. For infrastructure in particular, the decision processes of Byzantine creations like Macquarie and Babcock and Brown have determined the allocation of investment. Unsurprisingly, the result has been a mess.

I’ve been making this argument for some time, so I can anticipate the immediate response that, if the case for privatisation developed in the 1980s were invalid, it would be necessary to advocate public ownership of all enterprises. I’m never quite sure if those putting forward such arguments are as ignorant of marginal cost and benefit calculations as they appear to be, or whether it’s simply meant as a debating trick. But it should not be hard to see that, if the public sector has lower costs of capital, while the private sector has (at least in a wide range of activities) lower operating costs and greater responsiveness to consumer demand, the optimal economic structure will involve public ownership of some firms and private ownership of others, that is, a mixed economy.

{ 31 comments }

1

Stephen Rose 01.05.09 at 12:50 pm

This is excellent:

“It should not be hard to see that, if the public sector has lower costs of capital, while the private sector has (at least in a wide range of activities) lower operating costs and greater responsiveness to consumer demand, the optimal economic structure will involve public ownership of some firms and private ownership of others, that is, a mixed economy.”

And I think it comports almost exactly with Obama’s predisposition. Which is why I believe his stimulus efforts will work. The Bush privatization efforts were essentially an admission of impotence. I think Barack’s moves will cannily create the melding you are pointing to.

2

Slocum 01.05.09 at 2:30 pm

Actually, I suspect we may see a new wave of privatization in the U.S. over the next few years driven by financial necessity. In Obama’s home state, Chicago just sold a 75-year lease for the parking meter system, and there have been discussions of selling the Illinois Tollways during the last couple of years also. And then there are the huge, badly underfunded public employee retirement burdens–I think it’s likely that state and local governments are likely to try to ease some of these problems by farming out more services — both in the short term (to close shortfalls) and long term (to avoid expensive future obligations).

This is at the state and local level rather than the federal level, but one of the things that people outside the U.S. consistently fail to appreciate is how much in the U.S. happens at a state and local rather than a federal level. And these government entities are no longer good credit risks with a low cost of capital:

Default fears weigh on U.S. muni bond market
http://www.reuters.com/article/reutersEdge/idUSTRE4B46JD20081205

3

Tim Worstall 01.05.09 at 2:37 pm

Well, there’s another argument in favour of privatisation. D2 used the reverse on me once: Some things like, say, water and sewage provision have public goods aspects to them. Government is more likely to be able to consider these aspects and thus find such services to the socially optimal level.

OK, so far as it goes. But after privatisation the water companies in England and Wales started investing more capital than the government had done previously. This might mean that they were investing too much in said public goods aspects (a slightly odd thought) or that government, while it could have invested the socially optimal amount it, for some reason, did not. Like, perhaps, he political process isn’t all that good at such calculations of the socially optimal amount either.

4

Tim Worstall 01.05.09 at 2:38 pm

“thus fund,” not “thus find”. Tchah!

5

OneEyedMan 01.05.09 at 3:06 pm

But it should not be hard to see that, if the public sector has lower costs of capital, while the private sector has (at least in a wide range of activities) lower operating costs and greater responsiveness to consumer demand, the optimal economic structure will involve public ownership of some firms and private ownership of others, that is, a mixed economy.

This is a could relationship, not a will relationship. It is certainly possible that government could have always cheaper funding, but sufficiently lower efficiency that it is nevertheless always cheaper for private operation.

Given that the lower cost of capital is a function of the compulsory power of the state to tax and its power to debase the currency, I’m not sure hpow heavily we want to depend upon it for our economic organization.

6

Odm 01.05.09 at 3:48 pm

The GFC has shown that, for most of the past decade, market estimates of the relative riskiness and return of alternative investments have been entirely unrelated to related.

I think you mean unrelated to reality.

7

lemuel pitkin 01.05.09 at 4:00 pm

I can anticipate the immediate response that, if the case for privatisation developed in the 1980s were invalid, it would be necessary to advocate public ownership of all enterprises. … But it should not be hard to see that, if the public sector has lower costs of capital, while the private sector has (at least in a wide range of activities) lower operating costs and greater responsiveness to consumer demand, the optimal economic structure will involve public ownership of some firms and private ownership of others, that is, a mixed economy.

But isn’t there *some* truth in this response, in that the argument you are makign ehre isn’t jsut an argument against privatizatio0n, but an argument for public ownership, presumably including of some currently private firms?

In other words, your final lines — while absolutely right as far as they go — do beg the question of *which* (kinds of) firms should be publicly versus privately owned, and whether there is any reason to think the current division is anywhere close to the preferred one.

8

Randy Paul 01.05.09 at 4:14 pm

The fiscal case for privatisation must be assessed on a case by case basis.

Precisely. Clearly the attempts to privatize water supplies in Bolivia were unmitigated disasters and led to civil unrest (understandably so). Privatization of the telephone company in Brazil was a net positive as many had to wait for years to get a phone when Telebras was a state-owned monopoly. Companhia Vale do Rio Doce, the world’s largest iron ore miner now employs more people as a privatized entity than it did as a public one. On the other hand, Petrobras is a very efficient company that has become one of the leaders in deep water drilling.

With regard to Latin America, it’s worth noting that state-owned enterprises can often be more an example of nationalism than left-right ideology. Some of the major enterprises such as the Itaipu Dam, the nuclear reactors at Angra dos Reis and the Transamazonica Highway were developed by the right-wing military dictatorship in Brazil. Also, although Pinochet did invite Alcoa and other copper miners back to Chile after the coup, he kept Codelco, the world’s largest copper producer, a state-owned entity, in part I would imagine because 10% of the earnings are earmarked for the military. It was the socialist president, Ricardo Lagos who wanted to sell Codelco, spend the money on non-military purposes and tax the industry a little more heavily.

9

someguy 01.05.09 at 4:40 pm

I am not sure I get it.

The EMH is that no other alternative is as efficient not that the free market the allocation is all that efficient.

Ok but the EMH is wrong. An alternative that did not involve so much capital for first internet start-ups and then housing would have been more efficient.

But how do we get from there to public capital?

Don’t we still need to conclusively identify those sectors that consistently face excessive capital costs?

Public ownership means what? How much and what type of ownership does public capital require?

So the US should sell Amtrack and provide cheap capital to the new owners?

10

Ginger Yellow 01.05.09 at 4:54 pm

Even before the GFC, the case for privatisation had been undermined in a lot of ways. For instance, the UK government pays more in rail subsidies now than it did when the railways were owned and operated by the state. This is despite TOC franchises being awarded mainly on the basis of which company promises to pay the most to the government. Of course, after the franchises are awarded, the companies suddenly “discover” that they can’t actually pay the government as much as they said, or in some cases anything at all. And both Australia and the UK have extensive experience of the, shall we say, imperfect risk transfer of public private partnerships.

11

lemuel pitkin 01.05.09 at 5:23 pm

Someguy’s questions seem reasonable. Of course there are several reasons for public ownership — (1) cheaper costs of captial for the public, (2) externalities, (3) cases where satisficing (achieving some minimum level of output) is more important than maximizing, (4) cases where the public is the only purcahser of the good or service. (Of course you can address the first through public financing rather than public ownership, the second through taxes and subsidies, the third with regulated monopolies.) Anyway, I’d be very curious to hear John Q.’s views on which sectors — both in terms of general chracteristics, and specific sectors — should be owned privately, and which should be owned publicly.

For a start, it’s hard to see why we would want private ownership of utilities (including electricity and phone service), basic health care provision (not just financing), transporation infrastructure (including airlines?), insurance, and a bunch of other things that are currently private in part or in whole. All have high capaital costs, significant externalities and/or information issues, need to be provided more or less universally, and don’t have important variations in taste either over time or across the population.

12

ajay 01.05.09 at 5:26 pm

But after privatisation the water companies in England and Wales started investing more capital than the government had done previously. This might mean that they were investing too much in said public goods aspects (a slightly odd thought) or that government, while it could have invested the socially optimal amount it, for some reason, did not. Like, perhaps, he political process isn’t all that good at such calculations of the socially optimal amount either.

Or, possibly, that the optimal amount changed? I’m not saying that this is what happened, but it’s possible that the optimal amount to spend on, say, renewing water mains was £x in 1960, because the Victorian-built water mains were generally OK, but by 1995 they were all starting to fall apart and the optimal amount became £5x. (And it wasn’t optimal to replace them back in 1960 because the old ones still had a lot of life left in them.)

13

Alex 01.05.09 at 6:07 pm

This might mean that they were investing too much in said public goods aspects (a slightly odd thought) or that government, while it could have invested the socially optimal amount it, for some reason, did not.

Or that the government acted in bad faith, thus providing the ostensible reason to take action that suited its ideological preferences. That the government might do this is a regular argument of yours in favour of libertarianism, privatisation, etc. It is highly telling that this objection seems to vanish when the action involved suits your ideological preferences.

In general, the argument that such-and-such a public service needs investment and therefore it must be privatised only holds water if the government is actually practically unable to fund the investment. If it needs capital investment, and the government is not actually credit-rationed, why has the government not invested enough? It is in the best position to do so. Either it doesn’t think investing in service X is important, or else it’s not investing in it because it wants to privatise. Therefore, either way, it’s lying about the reason for the privatisation, and the first principle in Daniel Davies’ “Things I learned at an extremely expensive business school” is invoked: “Good ideas do not need lies told about them”.

However, this being said, it has recently come to my attention that there is at least one good argument for utility privatisation other than “We are the masters now”. That is, it means that Boris Johnson is not directly in charge of my drinking water, sewerage, electricity or gas supply.

Which I think we can all agree is a good thing. But how would my answer change if Rebecca Mark was in charge of my water and Ken Livingstone was still mayor of London? At least I have a vote against Boris.

14

notsneaky 01.05.09 at 7:00 pm

“it’s hard to see why we would want private ownership of utilities (including …and phone service)”

Ummm, don’t we pretty much have private ownership of phone services – the kind that matter – and isn’t it working out quite well?
(I’m willing to give you electricity. For now)

15

Stuart 01.05.09 at 7:52 pm

OK, so far as it goes. But after privatisation the water companies in England and Wales started investing more capital than the government had done previously.

Don’t you mean they were legally obligated to invest more capital by the regulator, which was a known requirement that was offset by the government massively undervaluing the assets being sold to them?

16

noen 01.05.09 at 7:55 pm

“isn’t it working out quite well?”

Depends on what you mean by that. With government ownership there is a mandate to provide service to everyone. Everyone gets electricity, everyone has a post office nearby, everyone has a phone. This is no longer true. America is turning into a third world country where only the few will have necessities. Access to health care has been withdrawn to corporate enclaves and prices for dental care have skyrocketed out of most people’s reach. If you privatize water and sewage expect to have shit running in the streets because the logic of every corp is to make money. Privatizing public utilities will follow the exact same path that health care has followed.

All around the world we are seeing the rise of “green zones” where wealth and privilege are concentrated surrounded by barrios. This will come to America and the rest of the first world also. It’s exactly what certain people want. They want a global aristocracy, a global feudal state and most of all no more middle class. These economic “theories” are design to deliver just that.

17

roger 01.05.09 at 7:56 pm

I recently wrote a review of Niall Ferguson’s Ascent of Money, and couldn’t resist a shot at one of his neo-connish moments, praising the privatization of the social security system in Chile. The book is keyed to a tv series, so it includes telegenic on site bits, and in one of them Niall is in Santiago, marvelling at the wonders of the Chilean stock market and the beauty of the privatization of social insurance engineered by Pinera. After the book was in press, of course, things got a little hairy – in fact, so hairy that the estimate is that Chile’s privatized system lost 25 percent of its market value last year. Oh well, so much for strapping the citizen into the bowels of the ownership society. It is going to be interesting to see what happens if, as seems likely, Chile moves to a more U.S. like Social security system. It will just kill the media, which has had a narrative about successful Chilean “reforms” that has run for years.

18

armando 01.05.09 at 9:11 pm

I thought that the decision to privatise in the UK was more obviously political than economic. It is easy to see why governments under invest in public companies and utilities since there is plausibly an electoral advantage to cutting costs even when that is an unsound decision in the middle to long term.

Having then under-invested in a public company, or being elected and having to face running such a company, isn’t it clear that governments face a strong disincentive to go through the painful and costly process of proper investment? So, even beyond wanting to champion free market ideology, you can certainly see why governments would want to pass on assets to private companies who can be unpopular without directly implicating the government.

19

Sebastian 01.05.09 at 9:17 pm

“But it should not be hard to see that, if the public sector has lower costs of capital, while the private sector has (at least in a wide range of activities) lower operating costs and greater responsiveness to consumer demand, the optimal economic structure will involve public ownership of some firms and private ownership of others, that is, a mixed economy.”

What happens on the border? What happens when a sector shifts so that it once had factors appealing to government ownership, but now does not? We’ve seen that it can be very difficult to convince governments to relinquish control except in very singular administrations.

Also, what evidence do we have that governments are particularly good at distributing resources efficiently? Both the EU and the US have horrific and stupid agriculture subsidies that dramatically distort both internal and external markets in almost entirely negative ways. Yet they persist. How do we keep that from happening if we have the government deeply involved in many more allocation decisions? If we are going to engage in a much greater percentage of government involvement in currently private allocation of capital, shouldn’t we try to figure out why it goes so horribly wrong in the agriculture case? And if we can’t fix that case, how can we keep similar influences from extending into the new cases?

20

Cityunslicker 01.05.09 at 11:19 pm

Many of the points say things such as ‘ shit will run in the streets because companies only care about money’

1. This is patently untrue, I have worked for a few large global corporates, the people and ethics are generally of a high standard – this is just pure ad hominem.

2. Governments only care about votes. If they can sell a plan they will. Currently Brown is looking to nationalise the banks and sell that as a vote winning idea. This has nothing to do with his own ideology, past beliefs – he has never suggested such a radical idea. But it will be done for pragmatic reasons and to win an election.

Democratic Governments, by the nature of their formation, are governed by the tyranny of the majority. I don’t see that this allows them moral superiority over private organisations at all.

Both public and private sectors have their short-comings in this regard; I think overall the public sector has more in my purely anecdotal experiences.

21

Chris 01.05.09 at 11:35 pm

Of course, after the franchises are awarded, the companies suddenly “discover” that they can’t actually pay the government as much as they said, or in some cases anything at all.

I’m curious – why weren’t their franchises revoked when they breached the obligations they incurred in order to obtain them?

22

lemuel pitkin 01.06.09 at 12:19 am

Sebastian-

Yes, in the real world, there are going to be hard cases, and any insitituional design is going to need to be revisited to ensure it hasn’t been gamed or captured. But that is true no matter where you draw the line between private and public, and in cases where pure laissez-faire is not possible (a broader set for me than for you, presumably, but non-negligible in any case) it’s not at all clear that it’s harder to set up a workable system of public ownership than of taxes/regulations/subsidies. The point of John Q.’s post was simply that one result of the financial crisis is that wherever we drew the line before, we should now move it to increase the area on the public side, because we have gained new information about the costs of private ownership. Or do you see exactly the same tradeoffs between public and private ownership as you did before the crisis?

(And that’s leaving aside the question of whether agricultural subsidies are so awful. If the goal was to allow European integration to go forward without unacceptable costs to the significant fraction of the population that lived off, and the larger fraction of the population with a strong attachment to, more or less traditional farming, it seems to me they worked as advertised. Funny, isn’t it, how arguments in favor of liberalization always hinge on the fact that the gains are large enough for the winners to compensate the losers? but when the losers actually try to claim compensation, the costs turn out to be prohibitive after all.)

23

Cranky Observer 01.06.09 at 1:11 am

> I’m curious – why weren’t their franchises revoked when they
> breached the obligations they incurred in order to obtain them?

Because they have already paid the campaign contributions (at a minimum) to the politicians who awarded them the contracts. That is exactly what is going on in Chicago in the example Slocum mentions: King Richard II has received enormous amounts of legitimate contributions from parking lot developers – and part of the deal has been the removal of street meters wherever a lucrative private garage is built. Handing over the balance of the meters in territory where large garages are not feasible is just the next step in that process.

Cranky

24

Pete 01.06.09 at 11:34 am

State capital has a political cost. This is partly down to the way it’s handled in public accounts: capital investment is presented in the same way as salaries and everything else, on an annual basis in the year in which it’s spent. This produces false comparisons such as “spend £X on hospital versus contract out for £X/10 a year for the next 20 years”, whereas the PFI version should be properly compared against the cost of capital.

In re: rail franchises, I think that there’s the factor that the rail system is “too big to fail” even for a day; no government is prepared to let a failing rail operator stop running rail services unless they have someone ready to take it over (which is what they have done). They don’t get revenue from the TOCs, they compete on which TOC asks for the lowest subsidy ..

In any case, rail operators (TOCs) really do very little – they manage the train staff and some station staff and that’s about it. Stations and track are nationalised (were privatised as railtrack, but that was a huge failure). Rolling stock is usually owned by leasing companies. They have a small amount of leeway in setting ticket prices, but that’s mosly governed by the horribly complicated Rail Settlement Plan.

Then there’s EU law, which appears to require some sort of privatised system that’s open to certain kinds of competition.

25

Tracy W 01.06.09 at 2:55 pm

My take on the private/public ownership is different, based on my experience of not understanding arguments for Public-Private Partnerships. Can people buy their supplies from alternative sources, or politically go without?
Selling coal has no general monopoly characteristics, so no need for government ownership despite the heavy capital investment in the industry.
Graham Sydney does have a monopoloy on selling his paintings, but even the most stereotypical chardonnay socialist is not going to argue someone’s badly harmed by not owning a Graham Sydney painting, so no need for the government to own Graham Sydney’s output.
Sewage treatment has definite local economies of scale, and has general environmental and public health benefits, so the government’s going to get itself involved.

If the government is going to get itself involved, then for one-off specialised projects I could never see a reason to believe that it would be more competent at writing contracts than at running the project itself. For purchases of general goods the government probably does better writing contracts, eg I can believe that the police manage to purchase petrol far more effectively than they could manage drilling, refining and transporting it, but if the government’s building something specialised like a sewage system, writing a contract to do so strikes me to be about as open to all the normal government incentive and knowledge problems as just building the thing directly involves.

As for the cost of capital argument, yes, government interest rates are lower. However that does not therefore mean that the government’s cost of capital is lower. At least part of the reason that people are willing to lend to governments at lower interest rates than to private firms is that governments can raise taxes to pay back loans. However raising taxes means increased administrative costs for the government and dead-weight losses for society. As these costs are shared amongst society generally, bond-holders benefit more from getting their bonds back than they lose from their share of the higher taxes. Just becuase the government has a lower cost of capital in the accounting sense does not mean that it’s cheaper for society as a whole.

The dynamic case for privatisation is based on the idea that the allocation of investment will be better undertaken by private firms than by government business enterprises. This claim in turn relies on the assumption that the evaluation of risk and returns undertaken by … will be far superior than anything that could be obtained by, for example, using engineering calculations of the need for investment in various kinds of infrastructure, and seeking to implement the resulting investment plans on a co-ordinated basis.

And it’s also based on the claim that politicians have strong incentives to invest in politically-appealing projects rather than engineering calculations of the need for investment in various kinds of infrastructure, and have serious problems stopping programmes that are no longer needed.

For infrastructure in particular, the decision processes of Byzantine creations like Macquarie and Babcock and Brown have determined the allocation of investment. Unsurprisingly, the result has been a mess.

The relavent question is whether it has been more or less of a mess than governments making equivalent decisions.

26

Alex 01.06.09 at 3:41 pm

If you privatize water and sewage expect to have shit running in the streets because the logic of every corp is to make money.

This didn’t actually happen in the UK, or in France for that matter. I say this in the interest of factual content.

27

dsquared 01.06.09 at 3:47 pm

He would have done better if he’d said “expect to have droughts in Yorkshire”.

28

Alex 01.06.09 at 4:36 pm

I well remember having them pre-privatisation, which just goes to show that people (like certain journalists) who say “Water problem? Hjurk hjurk? In England?” don’t deserve their drinking water.

Mind you, Thames Water plc is the company which decided it would rather build a desalination plant (i.e. convert natural gas into water) than repair the holes in the pipes through which a similar amount of water to the plant’s output leaks. And Boris is the man who let them, on the grounds that this was “pro-motorist”.

29

ScentOfViolets 01.06.09 at 4:37 pm

This:

All around the world we are seeing the rise of “green zones” where wealth and privilege are concentrated surrounded by barrios. This will come to America and the rest of the first world also. It’s exactly what certain people want. They want a global aristocracy, a global feudal state and most of all no more middle class. These economic “theories” are design to deliver just that.

and this:

And that’s leaving aside the question of whether agricultural subsidies are so awful. If the goal was to allow European integration to go forward without unacceptable costs to the significant fraction of the population that lived off, and the larger fraction of the population with a strong attachment to, more or less traditional farming, it seems to me they worked as advertised. Funny, isn’t it, how arguments in favor of liberalization always hinge on the fact that the gains are large enough for the winners to compensate the losers? but when the losers actually try to claim compensation, the costs turn out to be prohibitive after all.

I think are what strike at the heart of the matter. The problem here is not redrawing the line; it’s not deciding in advance what would constitute a good reason for moving it in either direction. Personally, I think there has been an large amount of evidence – even an overwhelming amount – that reflexively privatizing everything under the sun did not work out as claimed.

But that is not what libertarians/conservatives believe. Instead, there is a lot of talk about confounding factors, about how “That’s not real privatization.” Since there were no agreed-upon criteria before these experiments were tried, when they fail, they can always retreat without having lost significant ground on the overall argument. My question is, why isn’t Sunshine legislation used more often? Yes, go ahead and privatize, but if certain criteria are not met by a certain time, the situation reverts to what it was before the legislation. I don’t see how anyone on any side would lose from this arrangement.

30

jack lecou 01.07.09 at 7:02 am

I had a professor who liked to say that in the border cases — mostly the “natural monopolies”, that must either be public run or heavily regulated — you should use the rule of thumb that if it’s working satisfactorily, leave it alone. If not, try flipping it to the other side.

This always seemed like sound enough advice to me. It’s absurd to make broad categorical, at least for the precise location of that border. When you get close enough to that fuzzy zone, a whole lot depends on very localized idiosyncrasies of geography, culture, business environment, government structure, management quality, etc.

So maybe the water utility works well in your town privately run. And maybe in the next city over it’s not working so well and they should consider switching it to more public management. It’s all in the details, and it’s usually very difficult to say with any certainty more than “It isn’t working this way. Let’s try it the other way.”

Which brings us to Sebastian:

What happens on the border? What happens when a sector shifts so that it once had factors appealing to government ownership, but now does not? We’ve seen that it can be very difficult to convince governments to relinquish control except in very singular administrations.

This is, I think, very much looking at the situation with blinders on. For one thing, it should be obvious that it is often equally difficult to move the other way – to move poorly performing private systems into public management. The same forces that resist one way (political ideology, entrenched interests, institutional inertia) resist equally well in the opposite direction. Movement between the sides is usually only possible in particular political moments, or when the problems become very bad. There are lots of examples, but for a big one, just look at the US health care system.

Also, this whole thread is about how we have just gone through a couple decades where in many places it has been quite easy to slide things from public to private management. That’s a lot of “very singular administrations”.

Clearly there’s tottering back and forth and some overcorrection, but I see no evidence that there’s necessarily any long term bias to one side or the other of the optimum.

31

virgil xenophon 01.07.09 at 9:05 am

Alex/

In re: your example of Thames Water PLC, I would remind you that often it’s not just motorists but business who depend upon them who often die off in the short run while authorities attempt to fix long run problems. As jac lecou makes the point, it all depends on the circumstances. Here in New Orleans prior to Katrina an attempt at comprehensive sewer repair/street resurfacing on Tchoupitoulas St turned into a 3-yr affair that ripped up the streets and killed half the businesses. When completed the project was a marked improvement, but not for the people driven bankrupt by the very project that was supposed to help them. When the City proposed similar comprehensive improvements for Magazine St–another major business thoroughfare a few blocks over running parallel to Tchoupitoulas St.–the small shop owners, art galleries, etc., with the example of what happened to their brethren a few blocks over, went up in arms at the prospect of being “improved” out of existence and forced the City to make only temp. short-term patches–so Boris’ concerns weren’t necessarily unfounded. In this case it was the City Sewerage & Water Board that temporized, not a pvt company. There is always a struggle between long-term “preventive maintenance” and short-term “operational” needs that is never easy to balance out whether the chosen mechanism is public or private. As lecou points out–it all depends….
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