Privatizing public goods<\/p>\n
Imelda Maidir, Department of Economics, Centre for Strategic and
\nInternational Studies, Jakarta<\/p>\n
One of the controversial points in the conditions of the
\nInternational Monetary Fund for loan disbursement to Indonesia is
\nthe obligation of the government to privatize some of formerly
\nstate-owned enterprises. This attracts much attention as most of
\nthe enterprises deal with the provision of infrastructures, which
\nare long time perceived to be the rights and the responsibility
\nof the government.<\/p>\n
In some circumstances, public ownership may achieve social
\nobjectives at lower costs. In fact, the high level of subsidies
\ncompared to the consumer benefits, and the lack of incentives to
\nrespond to market signals and reduce costs indicate the need to
\nrevise the distribution of public goods. This would include the
\nreconsideration of government involvement in the provision of
\npublic goods.<\/p>\n
While water supply, energy and telecommunications are
\nessential services, this does not justify public sector
\nprovision.<\/p>\n
Food is at least as essential as these public utilities, but
\ngiven the agricultural failures of centrally planned economies,
\nfew would argue that public sector provision increases food
\nsecurity. In spite of political reasons there are no valid
\neconomic arguments supporting the idea that such infrastructure
\nshould be provided by the government.<\/p>\n
Without public ownership, governments can monitor health and
\nsafety standards and ensure competition in infrastructure
\nindustries, as they do in food industries. In fact, government
\ncan more effectively regulate standards when it does not own
\nfirms in an industry. Remaining an impartial umpire is difficult
\nwhen also playing in the game.<\/p>\n
Furthermore, private firms can be sued for damages arising
\nfrom failure to meet standards, but government firms usually
\ncannot. Hence, an infrastructure's monopoly network aspect
\ndetermines the need for government involvement, rather than its
\nessential nature.<\/p>\n
Nevertheless, many economies regard public utilities as
\nessential goods to which users have inherent access rights, with
\nservices provided free or at very low prices. However, such
\nperceptions are largely politically determined, bearing little
\nrelation to economic realities.<\/p>\n
Electricity and telecommunication are no more essential than
\nfood or clothing, which private firms typically provide at market
\nprices.<\/p>\n
But, water may be an exception. Polluted drinking water can
\nseriously undermine health, but households can only measure water
\nquality by taste and smell. Communities, therefore, require
\naccess to at least a minimum life-line amount of clean water at a
\nzero or minimum price, with effective regulatory controls on
\nwater quality.<\/p>\n
However, once this essential need for water is satisfied,
\nadditional water supplies should not be zero priced or
\nsubsidized, and operators can fully cover costs of supply.<\/p>\n
Therefore, as long as government requires private operators to
\nmeet social obligations, private operators can provide additional
\ncommercial water supply services. Contracts with private water
\nsystem operator could stipulate limited volumes of free water
\nfrom communal wells or pumps, but house connections could be
\nprovided at the full cost of supply.<\/p>\n
Cross subsidies from other users or, more transparently,
\ngovernment budget funded subsidies could meet these public
\nservice obligations.<\/p>\n
So, when is state-owned justified? First, effectively
\nassigning private property rights is impractical, such as water
\ncatchment areas.<\/p>\n
Unbundling of water sectors should precede commercialization
\nor privatization. Resource management functions, which the bill
\nhas already reached the house, such as catchment planning and
\nmanagement should be separated form potentially commercial
\nfunctions of service delivery. Government should be responsible
\nfor the former; private operators can compete to provide the
\nlatter.<\/p>\n
Second, the cost of regulating is too high. The relative cost
\nof public ownership may be low when processes are simple. A
\nprivate firm has substantial monopoly power, and the information
\ncosts of regulating a private monopoly are very high, such as in
\nmanaging a wholesale electricity market.<\/p>\n
Third, having strong public good aspects, as charges cannot be
\nlevied. Privatization is likely to result in under provision of
\npure public goods. But, we must carefully define the notion of
\npublic goods. For example, different from water, clean water is
\nproduced. Its supply needs to follow the cost minimization
\nprinciples. Once consumed by one person, no one else can consume
\nit. Therefore, it is possible to exclude people from its use.<\/p>\n
Privatization of state-owned enterprise (SOEs) does not always
\nharm the consumer. Noted, some studies have found that if
\nmonopoly regulation allowed private firms to function efficiently
\nand protected consumers, privatization in both competitive and
\nmonopoly markets improved welfare in 11 out of 12 cases examined.
\nTo some extent, gains came primarily from improved services,
\ndeliver significant cost savings and better pricing.<\/p>\n
Meanwhile, privatizing does not mean a total elimination of
\nthe role of the government. It is just putting the government in
\nits more appropriate role, as regulator. The government was still
\nlegitimate to ensure the sustainability of these fundamental
\nservices.<\/p>\n
Privatizing monopoly assets will not benefit consumers unless
\na carefully structured regulatory environment maintains
\ncompetitive pressures on private participants and ensures safety
\nand quality standards are met. Poorly developed private property
\nrights and commercial law, and non-transparent bidding and
\nregulatory regimes create major uncertainties for private
\ninvestors, increasing the cost and risks of privatization.<\/p>",
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