P1246990943JZoad

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ECW3830
Competition and Regulation
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Structure
Week 7 Hilmer report and industry restructuring
Week 5-6 Regulating monopolies and access to
essential facilities
Week 8 Liberalisation in aviation
Week 4 Theories and practice of privatisation
Competition and Regulation
Week 9 Structural reform and regulation in
electricity
Week 3 Deregulation rationales and experiences
Week 10 Competition and regulation in
telecommunications
Week 2 Theories of regulation
Week 11 Mergers, Cartels and restrictive
practices
Week 1 Rationale for competition policy and
regulation
Week 12 - Research topic. Regulation,
deregulation and privatisation in small open
economies
Week 13 Revision
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AimsOn completion of this topic students should
be able to

• Understand the theoretical explanation of the
  reasons of privatisation
• Recognise approaches to and methods of
  privatisation and
• Elaborate on the issues of the Australian and
  international experience of privatisation.

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Essential Reading
Rationale for competition policy and regulation

• In the unit book
• J.A. Kay and D.J. Thompson, Privatisation A
  Policy in Search of a Rationale, Economic
  Journal 96 18-32 (Reading 8)
• Stephen King and Rohan Pitchford, Privatisation
  in Australia Understanding the Incentives in
  Public and Private Firms, Australian Economic
  Review (1998) 31(4) 313-328 (Reading 9)
• Boycko, Maxim Shleifer, Andrei, A Theory of
  Privatisation Economic Journal, Mar 96, Vol. 106
  Issue 435, p309-319, 11p (Reading 10)
• Available electronically
• Megginson, W Netter, J (2003), History and
  Methods of Privatisation, in D Parker and D Saal,
  (eds) International Handbook on Privatization,
  Cheltenham, Edward Elgar. p25-40
• Robinson, C (2003), Privatization Analysing the
  Benefits, in D Parker and D Saal, (eds)
  International Handbook on Privatization,
  Cheltenham, Edward Elgar.  p41-59

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Week 4 Theories and practice of Privatisation
The Australian and worldwide trend to
privatisation
Concepts, definitions, theories
The broader privatisation agenda
Privatisation, corporatisation and market power
the role of regulation
Has privatisation improved performance?
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Theories and practice of Privatisation
The Australian and worldwide trend to
privatisation

• Privatisation has been an important trend of
  government policy in Australia and overseas in
  the last three decades
• Industries affected
• Energy
• Telecommunications
• Airlines
• Airports
• Railway transport
• Public transport in large metropolitan regions
• Public roads (through improvement/construction
  projects)
• Prison management
• Outsourcing of governmental services (such as
  employment services)

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Theories and practice of Privatisation
Concepts, definitions, theories
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Theories and practice of Privatisation
Concepts, definitions, theories
Privatisation
Privatisation is the transfer of property or
responsibility from the public sector
(government) to the private sector (business)

• Two Themes/Aspects
• Publicly owned businesses in market economies (we
  are concerned with)
• microeconomic reform/privatisation in an
  essentially established market environment and
• Economic transition in former communist countries
• Rather fast bulk reform/privatisation, no market
  environment

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Theories and practice of Privatisation
Concepts, definitions
Privatisation is the transfer of property or
responsibility from the public sector
(government) to the private sector (business)
Forms of ownership
Privately owned business
Partnership
Non-for-profit private organisations
Cooperative
Non-for-profit public organisations
Public (listed) corporation
Governmental institutions
Official (government owned) business
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Theories and practice of Privatisation
Concepts, definitions
Privatisation is the transfer of property or
responsibility from the public sector
(government) to the private sector (business)
Restructuring ownership
Establishing government business enterprise
Nationalisation
Corporatisation
Municipalisation
Privatisation
Foreign investment regulations
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Theories and practice of Privatisation
Concepts, definitions
Concepts, definitions, theories
Government Business Enterprise
Telecom/Telstra The Water Board The Successors
to the State Electricity Commission of
Victoria
Public trading enterprises
Public financial enterprises
The State Bank of NSW
Statutory Marketing Authorities
The Australian Wheat Board
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Theories and practice of Privatisation
Concepts, definitions
Concepts, definitions, theories
Government Business Enterprise
Established as government business enterprises
Nationalised private enterprises
Commercialised governmental authorities
Telecom
British coal mines
The Successors to The State Electricity
Commission of Victoria
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Theories and practice of Privatisation
Concepts, definitions
Concepts, definitions, theories
Government Business Enterprise
O B J E C T I V E S OF REFORM
To increase in efficiency and competitiveness,
but where a more comprehensive reform is not
reasonable
Natural monopolies/ Public utilities Access
pricing Externalities Defense
Commercialised governmental authorities
Also the in following topics
As an interim stage of a more comprehensive
reform
Week 9 Structural reform and regulation in
electricity
The State Electricity Commission of Victoria
Week 10 Competition and regulation in
telecommunications
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Theories and practice of Privatisation
Concepts, definitions
Concepts, definitions, theories
Corporatisation
A government business enterprise is transformed
into a public corporation however, the majority
of shares is owned by the government
Telstra after the first (October 1997) and second
(October 1999) tranches
Also the in following topics
Week 9 Structural reform and regulation in
electricity
Week 10 Competition and regulation in
telecommunications
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Theories and practice of Privatisation
Concepts, definitions
Concepts, definitions, theories
Sales, tenders, share float
The next stage after corporatisation - the
government sales its share of GBE
Sale - to anybody who buys Tender
- competition of projects (SEC,
Victoria) Share float - sale of shares to the
public (Telstra)
Also the in following topics
Week 9 Structural reform and regulation in
electricity
Week 10 Competition and regulation in
telecommunications
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Theories and practice of Privatisation
The broader privatisation agenda
Common arguments for privatisation

• Develop profit-maximisation initiatives
• Making a privatised industry more
  competitive/efficient
• Reducing costs/prices
• Avoiding over-investment and creation of excess
  capacities
• Testing the activity of a firm by market forces
• Reducing public debt through sales proceedings

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Theories and practice of Privatisation
The broader privatisation agenda
Common arguments against privatisation

• Is it possible to promote competition within a
  natural monopoly
• is it possible to make a privatised industry
  more competitive/efficient or to reduce
  prices/costs if the AC curve is sloping
  downwards
• It is unreasonable to replace a public monopoly
  with a private monopoly
• it is necessary to take into account all the
  costs of privatisation
• the government gives up the revenue of government
  owned enterprise and therefore increases in the
  burden of taxation.

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Theories and practice of Privatisation
Privatisation, corporatisation and market power
the role of regulation
Key question

• If transition to GBE/corporatisation/privatisation
  do not significantly reduce market power, can
  the government avoid regulating the newly
  established commercial industry/company?

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Theories and practice of Privatisation
Privatisation, corporatisation and market power
the role of regulation
Publicly controlled corporation or privatised
company, deregulated price
GBE/Publicly controlled corporation, regulated
price
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Theories and practice of Privatisation
Privatisation, corporatisation and market power
the role of regulation
Price cap regulation is a normal approach to
containing increase in price by privatised
companies that retain market power
Publicly controlled corporation or privatised
company, regulated price
Monopoly
A monopoly faces a kinked demand curve and either
accepts a lower level of profitability, or
reduces costs, particularly reducing the quality
of product/service. Then, the quality should be
regulated as well. (The issue of Telstra in rural
Australia)
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Theories and practice of Privatisation
Privatisation, corporatisation and market power
the role of regulation
Price cap regulation is a normal approach to
containing increase in price by privatised
companies that retain market power
Publicly controlled corporation or privatised
company, deregulated price
Oligopoly
An oligopolistic firm faces a kinked demand curve
and either accepts a lower level of
profitability, or should straggle for reduction
of costs. Product quality IS NOT reduced if the
company faces competitors. If the competitor(s)
do not survive, the winners demand shifts
outwards and can bring additional revenue and
profit. For this (if costs are not also reduced)
the company should switch to sales maximisation
mode.
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Theories and practice of Privatisation
Has privatisation improved performance?
How to evaluate the outcome
From the fiscal policy perspective

• Does the net present value of savings as the
  result of
• Reduction in servicing public debt and
• Reduction in subsidies to the privatised formerly
  public company
• Exceeds
• The net present value of the revenue stream
  forgone as a result of privatisation?

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Theories and practice of Privatisation
Has privatisation improved performance?
How to evaluate the outcome
From the economic efficiency perspective

• Has the competitiveness of the industry
  increased?
• Have prices become any closer to marginal costs?
• Does consumer pay a lower price?
• Have internal costs decreased?
• Does the new market structure provide for
  technical progress gives incentive to new
  owners to invest in new technologies/products?
• Do the benefits of reform not supersede the costs
  of additional regulation (if it is required)?

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Revision questions for the next weektutorial
Theories and practice of Privatisation

• What changes in conduct and performance of a
  company/industry can be expected as the result of
  
• Transformation from statutory authority to GBS
• Corporatisation
• Privatisation?
• Is it possible to measure the economic outcome of
  privatisation? Explain.
• Why regulation, and what kind of regulation may
  be required of a privatised industry/company?
• Prepare your cases of privatisation in Australia
  or overseas.
• What method of privatisation was used?
• What kind of market sructure was established as
  the result?
• Has privatisation improved efficiency?