The Hindu Business Line : Public sector not doomed to fail

Natural monopolies and rents. They are the bugbears of economics and economists. One could even call them spoilsports. For, because of them, models purporting to describe the functioning of free markets and why they should be preferred to other economic systems are flawed.

The assumption of perfect competition underlies market economics. Unfortunately, for free market adherents, this is untrue of large swathes of modern economies. Electricity transmission and distribution, water supplies, highways, ports and airports are indivisible in scale.

Maximising Efficiency

It would be absurd to build multiple power and water lines, roads to the same place or airports in one city. So the idea that competition and private ownership will maximise efficiency and minimise costs and prices has to be given up as far as these activities and services (which are indispensable and significant in any economy) are concerned.

Similar arguments apply to natural resources such as oil, coal and increasingly (in these days), water. A monopoly on these enables their owners to charge `rents', which is nothing but a euphemism for usurious prices.

It is, therefore, not surprising that natural monopolies and (to an extent) resources have been kept in the public sector and domain, even in rich countries, where free markets are an article of faith. Their experience has not been bad.

Successful Functioning

Efficiency levels have been maintained without profiteering or sacrificing profits. One need only see and use the underground metros in cities such as London, Paris, Washington and Singapore (and even Delhi and Kolkata) to realise that the public sector is not necessarily wanting in management and quality of services. France and the Nordic countries are outstanding examples of the successful functioning of public enterprises in utilities and transportation.

We, in India, have long discarded the notion that the public sector should be at the "commanding heights of the economy". Privatisation is seen as an end in itself. But the experience has been mixed. There are allegations that assets have been sold off cheaply, particularly in the case of land and mineral resources.

And our first brush with privatising electricity generation was a disaster. It cost the Government billions of dollars to settle with the Enron-promoted Dabhol Power Corporation's investors and creditors. But, the latest clutch of private investors is offering power for Rs 1-2 per unit compared to the Rs 6-7 that had to be paid to Dabhol Power!

Natural Monopolies

Privatising electricity transmission and distribution and water is, however, proving intractable. In the former case, theft is affecting the viability of Electricity Boards. If it can be arrested or contained, they can flourish in a public sector dispensation.

There is no reason why, given autonomy and good management, the public sector cannot deliver the goods in sectors characterised by natural monopolies. India itself has several outstanding examples (eg. the Railways) and France seems to have combined successfully the best of free markets and public ownership. That should be the way forward.

More Stories on : Insight | PSU | Financial Scan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Micro-finance — Lessons from Bangladesh

Public sector not doomed to fail

Rupee gains 12 paise

Banks staring at fewer takers for home loans

Swipe your debit card and drive away a car

General insurance unions for merger

Howden sees better scope here than in China

Margins for `commodity' guarantees

Rates more or less peaked: SBI chief

Bond prices fall on profit booking

Banks going slow on retail lending

Call rates end higher

Seminar on tax planning

Panel wants banks to improve redressal