Privatization and Deregulation: Is it really that good?

[aerius]

Privatization and deregulation, it seems like every time someone starts talking about utilities, healtcare, transportation systems, and insurance among other things, it doesn't take long before someone says "if we privatized the system, market forces will make it better & cheaper" or words to that effect. But the question is, does it really make things better?

In Ontario for instance, Consumers Gas had a monopoly on natural gas distribution to homes & businesses. If you wanted natural gas in your home for heating or cooking, they were the only ones you could get it from. Then about 5-10 years ago the market was deregulated and opened up for competition. Ww can now buy our gas off several companies, and they all have differing service plans and contracts. Prices did not go down, in fact I could swear they're price-fixing.

So getting back to the question. Is privatization and deregulation good? Do market forces really take care of everything and make things better? And where do we draw the line? Are there services, industries, or whatnot that should NOT be privatized?

[Master of Ossus]

Privatization and deregulation, it seems like every time someone starts talking about utilities, healtcare, transportation systems, and insurance among other things, it doesn't take long before someone says "if we privatized the system, market forces will make it better & cheaper" or words to that effect. But the question is, does it really make things better?

In Ontario for instance, Consumers Gas had a monopoly on natural gas distribution to homes & businesses. If you wanted natural gas in your home for heating or cooking, they were the only ones you could get it from. Then about 5-10 years ago the market was deregulated and opened up for competition. Ww can now buy our gas off several companies, and they all have differing service plans and contracts. Prices did not go down, in fact I could swear they're price-fixing.

So getting back to the question. Is privatization and deregulation good? Do market forces really take care of everything and make things better? And where do we draw the line? Are there services, industries, or whatnot that should NOT be privatized?

I've said it before and I'll say it again: governments fundamentally do not understand the nature of competition in the economy.

Privatizing is good provided that the industry is not a natural monopoly. When a natural monopoly is deregulated, all hell breaks loose consistently. Phones, electricity, gas, and other utilities should NEVER be privatized. They should ALWAYS be monopolies, at least on a local level. The California energy disaster which led up to the Enron scandal (and Governor Davis' ouster) was but one in a long sequence of governments totally ignoring basic economic principles: when you have a natural monopoly, making it into an artificially competitive market damages consumers.

[TrailerParkJawa]

I'm in agreement with MOO. Privatisation is bad when it concerns a natural monopoly like gas or water companies. Nobody was suffering under PG&E prior to deregulation, there was never any real need to dereg power.

[Hawkwings]

as companies compete, they start lowering prices. And how do you get prices even lower? Why, by lowering the quality too! Sure, some people will refuse to buy whatever it is you're selling, but when you can deliver 90% of the goods at 60% of the price, so what?

BTW, anyone read "Jennifer Government"?

[Broomstick]

If competition inevitably lowers prices why does the US have the world's most expensive medical care? And why do we have so many uninsured?

[Darth Wong]

Competition lowers prices when the consumer has:

1. The ability to easily switch from one seller to another
2. The knowledge necessary to determine which seller is superior

Condition #1 does not exist in, for example, provision of natural gas, where there is only one company with a pipeline to your house. Condition #2 does not exist where there is fraud on the part of the seller, which is why such fraud has been outlawed. And neither condition exists in the case of health care, where it is exceedingly difficult to determine how good a particular provider is, and it is often even more difficult to switch providers because the insurance is so often part of a group plan that you had no direct hand in choosing anyway.

[Plekhanov]

I’m with Master of Ossus, TrailerParkJawa & Broomstick on this one, privatisation & deregulation are good things but only in the right services and industries. For those with natural monopolies and also those that have an important social function privatisation & deregulation can be disastrous for everybody but shareholders.

The UK in many ways led the way on privatisation and some of those I very much agree with, the government has no place running car makers for example, but privatising public utilities (ie. gas, water, electricity) the Railways and deregulating the buses has been disastrous.

I used to work for Transco, a private monopoly created by privatising British Gas, which managed to be in the FTSE 100 and make huge profits despite being an utterly shambolic operation. There was no incentive to increase efficiency because the regulator would just take any savings off our prices, instead the most important part of the company wasn’t engineering like it should have been but the department with dealt with regulation (and how to avoid it). During my time there we had one major and a several significant structural changes in the company for no reason other than to try and hide profits from the regulator & allow us to screw yet more money out of the customers.

Deregulating the buses initially led to a proliferation of companies and routes, however predatory practices by the likes of Stagecoach soon got rid of most of the minor players creating ruthlessly maintained local monopolies which only run buses on the most profitable routes. This has left large areas of most towns with no access whatsoever to public transport significantly damaging the nation’s social fabric, local economies and also the environment as this forced people who had previously used the bus into cars.

Privatisation and deregulation are good up to a point but they don’t create the utopia that market ideologues would have us believe.

[General Brock]

I would agree with MOO and DW; the success of privatization and deregulation are industry dependent on discernable market laws, and any good businessman would understand this, and so would any halfways shrewd politician. The market quackery of privatization ideology is used to justify rewarding allies with spots in safe, profitable industries. Most people can see this; they just differ on whether or not it is legitmate politics. The thing is, once something is privatized, odds are you can never get it back.

The privatized highway maintenance here in Saskatchewan in an example of scrambled market/political forces caused by privatization. The Divine government sold off the all the material infratructure for highway care, in a privatization binge. Conservative ridings became well-cared for, as did properly-connected private paving companies, but overall the highway system degraded, and a lot of professional experience in caring for the roads was lost. Today, even under the supposedly left-wing NDP, no-one wants to spend money on roads, and re-implement the expensive older system that worked.

Our highways are riddled with potholes, rough and throughly worn stretches, and poor patch jobs. The occasionally re-surfaced stretches are cheaped out on, with the road shoulders left unpaved. The private companies aren't being hired as much, so they charge more, so thay can't be hired as much, and less gets done. The government dosen't want back into the business; hiring private companies to maintain the roads properly is too expensive, re-implementing the cheaper public system that worked is less expensive in the long run, but not maintaining the roads at all 'saves' them even more money. The government is frittering away money in other areas that deliver greater political gain and pays off their own buddies, while saying they are doing all they can for the roads and blaming the previous government for emptying the coffers and putting the province in debt.

[WyrdNyrd]

Competition lowers prices when the consumer has:

1. The ability to easily switch from one seller to another
2. The knowledge necessary to determine which seller is superior

Scott Adams captured the essence of #2 very well in one of his books. He described the concept of the Confusopoly. That's when various service-providers make the conditions and benefits of their service so complex and confusing that no person could possibly comprehend them (and still retain their sanity).

Thus, you cannot possibly differentiate based on quality or price. And so your decision gets swayed by advertising, or pushy sales-people, or something similar.

American long-distance phone carriers would be the classic example. Because each has different tariffs at different times of the day, but no-one uses the same times, it's impossible to say which carrier will cost you less over all.

Airline loyal programmes are another example. Each airline has a completely different algorithm for accumulating "air miles", with different criteria for reclaiming them, so direct comparison of cost/benefit is impossible.

Every industry has a leader. And if you're reading this book, chances are your company isn't that leader. So how do you persuade people to use your company when someone else is better? Easy! Form a confusopoly.

[Lord of the Abyss]

One of the best lines I've heard on this subject is this :

"The free market is just a tool,and there is no such thing as a universal tool."

Free market fundamentalists always want to use it to solve everything,but the world just doesn't work that way.

[Plekhanov]

One of the best lines I've heard on this subject is this :

"The free market is just a tool,and there is no such thing as a universal tool."

Free market fundamentalists always want to use it to solve everything,but the world just doesn't work that way.

A good example of the world nor working that way is the railways in the UK post privatisation as can be read about in this thread in N&P Problem: Rail overcrowding Cure hike prices & close stations.

[Sean Howard]

Me and my wife were just discussing this yesterday. She works for SBC, and she laments the 1996 Communications Act which deregulated phone service in the US.

Basically, because all the physical copper had been laid by the Bells and GTE long ago, it wouldn't make sense to allow companies to be constantly tearing up the streets laying new copper so they could get in on offering phone service. So what they did was ordered the Bells and GTE to allow any competitor to use their infrastructure and set a standard rate that Bell could charge. So the competitors are really just resellers for Bell or GTE. Of course the Bells and GTE claim that this standard rate is way too low, and they're getting screwed.

It is my position that the consumer is the winner here because you can now get long distance for $0.03 a minute, or shit even get a flat $30 a month for unlimited long distance. If you went back to 1995 and claimed you could get long distance for that rate, people would have called you crazy. Also, if a consumer finds themselves in a disagreement with SBC, they have the choice to switch their local service, which they could not do before 96.

The 1996 act is still causing chaos in the industry itself, but consumers are kicking ass in the deal.

[Surlethe]

Deregulating the buses initially led to a proliferation of companies and routes, however predatory practices by the likes of Stagecoach soon got rid of most of the minor players creating ruthlessly maintained local monopolies which only run buses on the most profitable routes. This has left large areas of most towns with no access whatsoever to public transport significantly damaging the nation’s social fabric, local economies and also the environment as this forced people who had previously used the bus into cars.

Outlawing predatory practices would essentially be reregulating, right?

[Plekhanov]

Outlawing predatory practices would essentially be reregulating, right?

Not really many of the business of the major bus companies (such as running free busses 30 seconds ahead of their smaller rivals until they went bust) were of dubious legality under normal competition law.

Under regulation local councils had a considerable say in the local transport systems under their jurisdiction this basically meant that if a private company wanted to run buses in any particular area their bus routes, timetables and fairs had to be agreed with the local authorities. This had the effect that if a bus company wanted the right to run buses on the popular and profitable routes they also had to run them on less profitable but socially necessary routes.

The deregulated companies once they attain their local monopolies tend to change timetables and routes at will and also unsurprisingly only run on profitable routes leaving many areas of town with little or no bus service, forcing people in those areas to get a car, use taxis or if they can’t afford those walk. This problem is especially marked in wealthy areas with high car ownership many of which have no bus services at all, this is not only very tough on the elderly and very young who are less likely to have cars but also forces people to drive when they might otherwise have got the bus thus contributing to congestion and pollution.

[Surlethe]

Outlawing predatory practices would essentially be reregulating, right?

Not really many of the business of the major bus companies (such as running free busses 30 seconds ahead of their smaller rivals until they went bust) were of dubious legality under normal competition law.

Under regulation local councils had a considerable say in the local transport systems under their jurisdiction this basically meant that if a private company wanted to run buses in any particular area their bus routes, timetables and fairs had to be agreed with the local authorities. This had the effect that if a bus company wanted the right to run buses on the popular and profitable routes they also had to run them on less profitable but socially necessary routes.

The deregulated companies once they attain their local monopolies tend to change timetables and routes at will and also unsurprisingly only run on profitable routes leaving many areas of town with little or no bus service, forcing people in those areas to get a car, use taxis or if they can’t afford those walk. This problem is especially marked in wealthy areas with high car ownership many of which have no bus services at all, this is not only very tough on the elderly and very young who are less likely to have cars but also forces people to drive when they might otherwise have got the bus thus contributing to congestion and pollution.

So if the government had actually enforced the competition laws, then the deregulation might have turned out all right? Or were the laws unenforceable?

[Plekhanov]

So if the government had actually enforced the competition laws, then the deregulation might have turned out all right? Or were the laws unenforceable?

Things would have been better if the government had enforced the competition laws in that prices would atleast be lower (indeed quite likely lower than unsubsidised prices pre-deregulation), however the more significant problem (in my opinion at least) of the less popular routes being closed would have remained.

I guess the government failed to enforce the competition laws for the usual reasons the prime one being a lack of political will, especially as the tory market worshippers who deregulated the buses in the early 80s remained in power for the next ten years when most of the predatory practices took place. Also as the big companies picked off a great many local bus firms, some of them very quickly, it would have taken an extremely pro-active and agile regulator to stop this.

However as I see it creation of local monopolies isn’t the major problem with deregulation, the mistake the Tories made was to take control from councils (corrupt and inefficient as some of them were/are) which tended to see public transport as an important component in a smoothly working society with important social, economic and environmental functions and instead give control to private businesses which instead saw public transport simply as a tool to make money with no consideration for how this affected the rest of society.