1 90OG PSD 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 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 Responsive Technology 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, and Productivity 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 Private Sector Development Department Occasional Paper No. 27 Privatization, Deregulation, and Competition: A Survey of 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 in Infrastructure Group, Private Sector Development Department, the views expressed are those of the author(s) and should not be attributed to the World Bank. The World Bank Private Sector Development Department ¶1 TABLE OF CONTENTS 1. Introduction .................1 1. Summary .1 2. Regime Changes: Some Preliminary Observations .1 3. This Report .3 2. Airlines .5 1. Discussion of Airlines .5 2. Table 1: Airlines .5 3. Trucking .7 1. Discussion of Trucking .7 2. Table 2: Trucking .7 4. Railroads .9 1. Discussion of Railroads .9 2. Table 3: Railroads .9 5. Local Transit .11 1. Discussion of Local Transit .1 2. Table 4: Local Transit .12 6. Transport Infrastructure .15 1. Discussion of Transport Infrastructure .15 2. Table 5: Transport Infrastructure .15 7. Telecommunications .............. 17 1. Discussion of Telecommunications .17 2. Table 6: Telecommunications . 18 8. Cable Television .19 1. Discussion of Cable Television .19 2. Table 7: Cable Television .19 9. Electric Power .21 1. Discussion of Electric Power .21 2. Table 8: Electric Power .21 10. Water .23 1. Discussion of Water Distribution .23 2. Table 9: Water Distribution .23 iii 11. Trash Collection ............................ 25 1. Discussion of Trash Collection .25 2. Table 10: Trash Collection .25 Bibliography ............................ 27 iv 1 INTRODUCTION 1. Summary Over the past twenty years, scores of countries in all regions and economic circumstances have experimented with or embraced policies of privatization, deregulation, and market liberalization. Although the purposes of these policy changes differ in important details, most are intended in some fashion to improve enterprise performance. This survey is a broad overview of the economics literature that analyzes the performance effects of such regime changes. It focuses on four important sectors of most countries' economy--transport, communications, energy, and local services--and reviews what is known about the impact on price, cost, quality, innovation, and productivity. The results of this survey may be summarized as 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 overall gains, some economic agents may find themselves worse off. * In the case of privatization, competition is an important--perhaps decisive--mediating force in bringing about the gains. Without competition and especially in the presence of regulation, 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 improve quality. 2. Regime Changes: Some Preliminary Observations The changes in market regimes sweeping countries around the world have raised one key question: To what degree have privatization, deregulation, and market liberalization improved the economic performance of enterprises? Of course, these regime changes often have purposes in addition to economic performance. Yet policies that fail to lower cost or price, improve productivity or innovation, or enhance financing and investment opportunities are not likely to be 1 2 Introduction judged successful. In this report, we provide an overview of the burgeoning economic literature that evaluates the performance outcomes of privatization, deregulation, and market liberalization. We begin by setting out the relevant definitions and distinctions. The term privatization refers to the shift from public to private provision of goods and services. The may be accomplished through outright transfer of ownership of an enterprise to private investors through asset sale, equity sale, or equity distribution. In each case this may be to a single owner, to the public at large, or to the enterprise's employees. Some would further cListinguish corporatization of 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 contracting out. Rather than converting publicly owned assets to private status, these involve private provision of goods and services according to government specification. Franchising typically implies sale of the specified product directly to the public (for example, electric power or cable television), while contracting out entails payment by the government to the private provider of the specified product to the public (trash collection). The wide variety of such techniques results from such issues as whether or not there is competitive bidding, whether or not the vendor supplies all inputs, the extent of sunk costs, and the duration of the contract. Deregulation in the present context denotes the withdrawal of government from a dominant role in making or constraining major decisions by an enterprise. These decisions may include profits, price level, price structure, service quality, entry, and investment. Short of complete deregulation, many types of regulatory reform may limit the government's role and enhance decision-making prerogatives of the enterprise, even instilling market-like performance incentives (hence the term "incentive regulation"). It should be noted that deregulation does not contemplate abandonment of economy-wide standards such as antitrust or environmental and safety regulations. And deregulation (like the regulation it replaces) presumes private ownership of assets and provision of services, since public ownership would allow direct control over such decisions. The term market liberalization refers to the existence or emergence of capable rivals in the production of goods or services. The rival may already exist ("actual competition") or it may simply 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 that competition should be understood as conceptually distinct from privatization and deregulation. Although liberalization is often implied by deregulation, the logical possibility of deregulating a monopoly illustrates the distinction between the two. Liberalization and privatization can be seen as alternative techniques for achieving similar objectives. Liberalization entails product market competition and brings consumer preferences to bear on producers. Producers are rewarded or penalized to the extent that they can deliver low-price, high-quality goods, which in turn requires attention to production costs and to new products and processes. Privatization, by contrast, releases capital market pressures on the Introduction 3 enterprise. Investors seeking higher returns buy and hold shares in those firms that achieve both profit 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 efficiency but, absent competition, the effects on price are less clear. 3. This Report This report consists of annotated bibliographies and brief discussions of what is known about the performance effects of regime changes in the transport, communications, energy, and local service industries of various countries. In all, ten specific industries are surveyed. These are airlines, trucking, railroads, local transit (primarily buses), transport infrastructure (airports, toll roads), telecommunications, cable television, electric power, water supply, and trash collection. Given the voluminous nature of the literature, the following strategy has guided the search and this report: First, an effort has been made to identify key summary articles of the literature on each industry.' Such summaries are especially useful in that they aggregate and interpret numerous other studies in a single source. A dozen such summaries in total will be listed and described first in each table.2 Next, some specific studies are noted, either because they are more recent than the cited survey(s) or because they are particularly important in their evaluation of the issues. Where appropriate, these are separated into studies that examine privatization vs. those analyzing deregulation. A total of about fifty specific studies together with perhaps another one hundred that 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 bibliographic references 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 of Economics, 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. Boardman and 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 so uncontrolled as to cast doubt on their conclusions. 2 The individual studies that comprise the summary are not separately identified, except as the next text paragraph provides. 2 AIRLINES 1. Discussion of Airlines The airline industry was the first major industry to undergo deregulation in the United States and privatization elsewhere. It is perhaps the most thoroughly analyzed experience with both. The Winston assessment of US deregulation represents a widely accepted judgment about the effects of deregulation, both for the US and other countries. Overall, fares declined and the average consumer has benefited enormously from deregulation and the forces of competition that it unleashed. The variety of services offered is much greater than before, and the quality (as measured by flight frequency) has risen. But there have been losers as well: Not all fares have fallen, notably on shorter hauls and thinner routes (yet even this represents greater cost efficiency). Increased travel restrictions, load factors, and travel time represent partial offset to overall benefits. And more recently, prices may have begun increasing as markets have become more 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 suggest superior performance by privately owned firms. Yet actual privatization of British Air has not resulted in a clearly or consistently superior record. Galal et al report some performance improvements after privatization of airlines in Malaysia and Mexico, but many aspects of their performance remain unchanged. 2. Table 1: Airlines Study Findings DEREGULATION: Joskow and Rose (1989) SUMMARY of early literature indicates regulated fares and service levels too high. Winston (1993) SUMMARY of literature to date suggests US fares declined, fare variation increased, service quality mixed: (flight frequency rose, but so has travel time and restrictions). 5 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 but largely favorable. Borenstein (1992) Average price rose 4% less than cost between 1984 and 1990. Price rose 5% more than costs on routes under 500 miles but fell 10% on longer routes. Studies show concentration among incumbents matters. Grimm and Milloy (1993) Deregulation of Australian airlines resulted in lower fares, more frequent 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, and revenue per employee than public Trans Australian. Pryke (1986) Comparison of nationalized BA with private British Caledonian shows 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 to privatization. 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 on productivity or prices, but investment increased. Aeromexico sale in bankruptcy led to rise in prices and labor productivity and to break-even operation for two years, followed by losses. 3 TRUCKING 1. Discussion of Trucking Like airlines, the trucking industry involves small to medium-scale production units. In such a naturally fragmented sector, competition could be expected to bring prices and costs down. Winston's summary captures a majority opinion about the effects of US trucking deregulation. Average trucking rates appear to have declined, although that average masks considerable 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, so that 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 actually rose 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, costs declined, 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-truckload l ________________________ part of industry. Ying (1990) Translog cost function on 61 trucking firms implies 7.5% cost increase in first year after deregulation. Later cost savings accumulate to 23% within four years. Ying and Keeler (1991) Rates for general freight declined 15-20% by 1983, 25-35% by 1985 7 4 RAILROADS 1. Discussion of Railroads Privatization and deregulation of railroads raise different issues since in many countries and particular markets, the huge sunk costs associated with railroads result in markets that may have monopoly characteristics. Winston summarizes a considerable literature on the US experience and concludes that overall rates may have fallen slightly after deregulation, while service quality improved considerably. Others like Boyer and McFarland doubt that, arguing that US regulation altered rate structure more than rate level. There is little dispute that deregulation has led to enormous changes in rates for particular commodities and locations, as varying degrees of competition and cost pressures have come to bear. At least one study reports that the initial effects of deregulation were adverse, with significant cost and rate increases. Two studies of private versus public ownership cast light on the relative importance of role of competition in improving performance. Caves and Christensen's well-known article on competing 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 companies efficient. An analogous conclusion emerges from a study of the corporatization of the New Zealand railroad. 2. Table 3: Railroads Study Findings DEREGULATION: Winston (1993) SUMMARY of literature implies overall rates probably fell, with much variation by product and location. Service time and reliability improved. Boyer (1987) Most likely effect is that rates rose, by about 2%. Principal effect on rate structure. 9 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 service quality increased substantially. Winston et al (1990) Rail service much improved, average price slightly higher (e.g., lower for 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 due to corporatization than to competition from deregulated trucking. 5 LOCAL TRANSIT 1. Discussion of Local Transit There is extensive worldwide experience with privatization and deregulation of local transit 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 that in the UK experience with express coaches, however, there was little effect in the initial year of deregulation and moreover that publicly owned firms proved capable of competing against private entrants. There and elsewhere, service innovations in the form of diverse transit vehicles appear to be fostered by deregulation. The evidence also suggests that private ownership of transit companies is superior to public 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 than ownership. As a privatization technique, contracting out is generally seen as lowering fares but less 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 of private ownership on costs or service. 11 12 Local Transit 2. Table 4: Local Transit Study Findings DEREGULATION: Pashigan (1976) Private US systems more efficient than publicly owned. State regulation less restrictive (resulting in highter profit) than local government. Cervero (1988) Review of taxi fare and entry deregulation for US cities largely favorable. Vickers and Yarrow (1989) Deregulation of express coach and local bus service in UK had little effect 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 reduction per mile, but fares constant or rising due to elimination of subsidies. PRIVATIZATION: Perry (1984) SUMMARY of studies of urban transit systems shows no simple correlation of efficiency and ownership: Six studies show private ownership better, 4 show public ownership, 3 find no difference. Public ownership associated with higher service levels, lower revenues. 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 of quality lower. Perry and Babitsky (1986) Study of almost 250 transit systems shows strictly private systems marginally superior to other arrangements. Contract managed systems no better than publicly owned. Savas (1987) Review of 5 studies in US, UK, and Australia shows public provision costs 55-100% more than private, about 50-60% when contracts awarded 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). Local Transit 13 Study Findings Review of diverse experiences with privatization and liberalization: "Benefits depend critically on whether effective competition can be established." Otherwise, service quality can suffer and fares rise. Schmidt (1995) Cities that select public vs. private ownership differ, so that comparisons may not reflect causation. With controls, finds little difference in service or costs, but more revenue raised from fares, not taxes, in private jurisdictions. 6 TRANSPORT INFRASTRUCTURE 1. Discussion of Transport Infrastructure Privatization of transport infrastructure has involved airports and roads in numerous countries 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 no performance effects. Both authors speculated that a major reason was the absence of competition for BAA. Gomez-Ibanez and Meyer also reviewed what is known about private road construction and operation. They report only one real performance comparison, which showed a 23 percent cost savings from private ownership. Other experiences vary widely, with some benefits 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 finds privately owned systems are 21%-50% less expensive than public provision, 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 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] principal evidence...comes from only one case." That case showed 10% cost saving due to better design, 13% due to productivity. Spanish system partially toll, partially tax financed. Fewer routes profitable. Experiences in Malaysia, Indonesia, Thailand show some advantages of private companies in raising capital. Extensive construction program for private toll roads in Mexico. Difficulties with cost and traffic projections, high tolls, need for subsidies. Recent efforts in US (Virginia, 4 in California) are marginal to highway system. "Public and private [real economic] costs appear roughly comparable," but "privatization does enhance innovation in selection, design, and operation of toll roads." 7 TELECOMMUNICATIONS 1. Discussion of Telecommunications Telecommunications has undergone regulatory reform or privatization in most major countries at this point. Complete deregulation is impeded by the concern that some parts of the industry may have monopoly properties or that there remain persistent advantages to the incumbent. A summary of the US experience with deregulating long-distance telecommunications is provided in Winston. He concludes that divestiture--the vertical separation of AT&T's long distance operations from its local exchanges--together with looser regulation resulted in a modest decline in overall rates, although two other studies find no such decline. Most agree that long distance rates fell substantially while local rates rose, as both were brought into alignment with costs. One study of state regulation finds prices lower where price caps and other forms of incentive regulation are in place. Kwoka' s decomposition attributes a significant portion of AT&T's productivity increase to growing competition and a significant portion of BT's to price cap regulation plus privatization. Crandall reports an initial decline in AT&T's productivity due to 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, one reports a rapid productivity gain and another notes some deterioration. Both Telemex and NTT, however, appear to have increased productivity after privatizations, perhaps substantially. 17 18 Telecommunications 2. Table 6: Telecommunications Study Findings DEREGULATION: Winston (1993) SUMMARY of literature shows modest decline in rates after divestiture, with looser regulation. Mathios and Rogers (1989) Comparison of AT&T rates in different states suggests most rates lower under price cap regulation relative to tighter traditional regulation. Crandall (1991) Effect of divestiture on overall rates insignificant, although local rates rose and long-distance fell. Growth in TFP increased steadily with competition, 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 by less than costs after 1984. Kwoka (1993) Competition responsible for 17% of TFP growth by AT&T between 1977-87. Initial effect of divestiture adve:rse due to transition costs. Privatization (subject to price cap regulation) responsible for 22% or TFP 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 led to greater price variation, higher profits, q[uestionable service effects. Galal et al (1994) No evidence that BT's productivity (or much else) altered by privatization until 1990. Telmex productivity, revenue, and profits rising rapidly. Prices have risen as well. Cave (1995) Weighted average real cost of all services has fallen by 40 percent since BT privatization. Local exchange rates have risen while calling rates have declined. 8 CABLE TELEVISION 1. Discussion of Cable Television Cable television in the US will soon complete its second cycle of regulation and deregulation. Early regulation by municipalities took the form of franchise bidding, which was criticized 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 took effect 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 in the number of channels. Two other studies, however, come to a different conclusion. They find service price (or cable share price) increased, even after controlling for quality change. Other studies suggest that duopoly cable systems have significantly lowered prices without sacrificing quality. One study also finds lower prices by municipally-owned cable systems, although there are no data quantifying subsidies or other advantages to public ownership. 2. Table 7: Cable Television Study Findings FRANCHISE BIDDING Zupan (1989a, 1989b) Studies find few franchise non-renewals (as Williamson and others predict), but little evidence that incumbents exploit position. This due to countervailing power by cities, plus operators' interest in maintaining reputation. DEREGULATION: Winston (1993) SUMMARY of small literature suggests quality-adjusted price declined. 19 20 Cable Television Jaffe and Kanter (1990) Event study shows share price increased by 7.5% with cable deregulation, except in large cities with broadcast competition. Rubinovitz (1993) Deregulation responsible for 18% price increase (43% of total increase). Rest due to quality and cost changes. COMPETITION AND OWNERSHIP | Emmons and Prager (1994) Cable rates significantly lower where duopoly operators exist and when municipality owns cable system. No differences in quality measured by number of channels. 9 ELECTRIC POWER 1. Discussion of Electric Power The electric power industry worldwide illustrates every possible difference in and change of regime--public and private ownership, monopoly and competition, plus vertical integration and deintegrated firm structures. These differences offer considerable insight into the effects of interest. The largest literature has examined public vs. private ownership, and most especially in the US. Five of the cited articles review other studies and conclude (in the words of Atkinson and 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 be due to the inefficiencies of regulation that accompanied private ownership. He also claimed that publicly owned utilities benefited from various subsidies that artificially lowered their costs, but a number of other studies (including that by Kwoka) hold such other factors constant and still find public ownership associated with lower costs. Evaluations of privatized--and separate--generation and distribution utilities in Chile report increases in profits and productivity. Deintegration together with privatization and liberalization in the UK appears to have resulted in performance gains in the newly-competitive generation sector, but not in monopoly transmission and distribution. In the US the cost efficiencies of integration appear considerable. 2. Table 8: Electric Power Study Findings Donahue (1989) SUMMARY of 6 studies: "No study even hints at superior private efficiency." Three show public more cost efficient, others find no difference. Viscusi, Vernon, Harrington SUMMARY of literature reveals lower prices from publicly owned (1992) utilities, but evidence on efficiency is mixed 21 22 Electric Power Study Findings Peters (1993) SUMMARY of about 20 studies: "Almost all of the econometric studies of costs and comparative efficiency found either no significant differences between ownership types, or an actual advantage.. .in favor of non-profit firms." Meyer (1975) Cost function study of 30 public and 30 private utilities in 1967-69 showed significantly lower costs for public firms. Peltzman (1981) Review of data show public firms have lower rates than private firms for 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 finds equal cost (in)efficiency. Galal et al (1994) Privatization (with subsequent regulation) of state-owned power generation company in Chile resulted in significant productivity, profit increases. Regulated, publicly-owned distribution utility in Santiago increased profits after shifting to private ownership. Robinson (1995) UK privatization resulted in huge manpower reductions by generating companies, smaller reductions by regional distribution companies. Consumer prices (especially residential) rose until 1993, then stabilized. Yarrow (1995) Deintegration plus liberalization and privatization in UK resulted in rapid productivity gains in competitive generation sector, but not in regulated monopoly transmission, distributlion. Prices have risen relative 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 to private, regulated firms. Please replace page 23 of Privatization, Deregulation, and Competition - A survey of Effects on Economic Performance 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 has allowed numerous performance comparisons. Donahue's summary of seven such studies concludes that there is "no tendency for private water utilities to be any more productive." While the occasional study does show the contrary, the others cited largely support this proposition. Privatization of water distribution in Buenos Aires appeared to improve service and quality, and lowered prices by 17%. 2. Table 9: Water Distribution Study Findings Donahue (1989) SIJMMARY of 7 studies: "No tendency for private water utilities to be any more productive." Four show no cost difference. 2 find lower 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; Unit costs 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. Publicly owned utilities slightly more efficient, but have much wider variation 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 lower thereafter. 23 11 TRASH COLLECTION 1. Discussion of Trash Collection Trash collection is undertaken through both public and private arrangements in the US and throughout the world. Private provision itself varies between contracting-out and open competition, further enriching the comparisons. Three summaries of studies--one covering just the US, the others for the US and other countries--conclude that private bid contracting is cheapest, followed by public provision, and last by open competition. Among the possible reasons for the latter is the loss of economies from multiple suppliers with overlapping routes. This result appears to be replicated for four Latin American cities, where the evidence also supports the superiority of bid contracting. At least one study raises some methodological questions about this result, claiming that the choice of public vs. private provision is itself not random. Various specification changes suggest 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 but one 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 contract collection." No evidence that service quality inferior. Donahue (1989) SUMMARY of 7 studies concludes that private, bid contractors to a municipality 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 sensitive to specification. Argues ownership status depends on delivery conditions, i.e., non-random, further confounding effects. 25 26 Trash Collection Bartone et al (1991) Higher labor and vehicle efficiency from franchise bidding/private provision in Buenos Aires, Caracas, Santiago, and Sao Paulo. 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