2000 Regulation Programme

I should like to begin this lecture by declaring an interest, a practice that I understand is at times followed by some members of your Parliament. In addition to my work at the Hudson Institute, and at The Sunday Times, I serve as a consultant to News International, BSkyB, and several energy companies that have a presence in the UK.

That the topics of privatisation and regulation should be linked is proof that monopoly power cannot be entrusted to private, profit-maximising corporations.* It must be placed under the control of the state, either through direct ownership, or by regulating its exercise. I shall in this lecture argue that regulation is a more efficient means of controlling monopoly power than is state ownership, that introducing competition is superior to both, but that merely chanting, in the manner of the Chicago school, that all monopoly power is transitory, is to elevate hope over experience, or at a minimum to give a very generous definition to the number of years that can be included in the word “transitory”.

But what I am about to say should not be taken as a failure to recognise that privatisation involves social costs, most notably those associated with the elimination of overmanning1, or naive belief that regulation is a perfect process. As Alfred Kahn has pointed out in his magisterial work on the economics and institutions of regulation, “Regulated monopoly is a very imperfect instrument for doing the world’s work…. Regulation is ill-equipped to treat the more important aspects of performance – efficiency, service innovation, risk taking, and probing the elasticity of demand. Herein lies the great attraction of competition: it supplies the direct spur and the market test of performance.”2

The quality of regulation is limited not only by the intrinsic difficulty of substituting administrative processes for the marvelous self-regulatory tool we call the competitive market. It is limited as well by

the resource advantage that regulated companies generally have over the agencies charged with regulating them; the information asymmetry that gives the regulated an advantage over the regulator; the ever-present dangers of regulatory capture or, on the other extreme, the hostility that regulatory staffs often have for the companies they regulate; the abilities of the men and women chosen for the arduous task of substituting their judgements for that of the absent competitive market; and the abilities and interests of the legislators who create the framework within which regulators must operate.

This latter point is especially important: the legal instruments handed to regulators by legislators often constitute a poisoned chalice, containing a brew that includes often-contradictory economic and equity potions, a dash of economic policy, a bit of social policy (subsidise this or that favoured group), and a large portion of political self-seeking (keep prices low and service quality high).

And the regulators themselves are of varying quality. I have known regulators who cannot distinguish a demand curve from a supply curve, and who think that marginal cost is the sum written in the margin of some accounting statement. I have dealt with others who are quite comfortable dealing with the intricacies of econometric models (the best know just how many pinches of salt to take with their regression equations), and with various sophisticated techniques for measuring the cost of capital. I have dealt with regulators who engage with intellectual integrity in the difficult search for answers that maximise efficiency and fairly balance the interests of consumers and investors, and with others who search only for the answers that will require more staff and prolong their tenure in office. This experience inclines me to agree with one leading scholar that “Individual persons … have mattered a great deal in regulatory history.”3 I know that the constitutionalists among you like to think that your government — and mine — is a government of laws, not men. Even a brief descent from an ivory tower will convince you that both matter, and in the case of regulation it may be men that matter more.

Regulation, in short, is not a perfect instrument for controlling private monopoly power. But it seems to serve the public interest better than does state ownership. To reach that conclusion, of course, requires two judgements — one ideological, the other economic.

On the ideological side there is the usual room for differences of opinion. If one has a general bias in favour of limiting the role of the state, it will not take elaborate comparative efficiency studies to persuade you to come down on the side of private as opposed to public ownership. If one generally favours stronger rather than weaker trade unions, one will inevitably favour a greater role for public ownership, since the politicians who ultimately control publicly owned enterprises are more likely to bow to the wishes of trade unions than are the managers who control the affairs of private-sector enterprises, presumably (although not certainly or always) in the interests of the shareholder-owners of the enterprise. To the extent that one believes that businesses should pursue non-economic, social goals, one will favour public as opposed to private ownership. And to the extent that one is certain that regulation of privately owned monopolies is doomed to failure, perhaps because “regulatory capture” is inevitable, one will prefer that monopoly enterprises remain in state hands, that being the lesser of the evil of unconstrained private power.

That considerations such as these, rather than a pure drive for greater economic efficiency, was a — some might well say “the” — driving force behind Britain’s privatisation wave few can doubt. One clear goal was to reduce the role of government in the economy and therefore in the lives of British subjects. That goal was achieved. Between 1979 and 1992 the portion of total employment accounted for by state-owned enterprises fell from 8%% to 3%, the portion of output from 10% to 3%, and the portion of total gross domestic fixed capital formation from 16% to 5%.4 All in all, state assets totalling some £45 billion were sold off.5

Another was to create a political force to offset the trade unions. Prime Minister Thatcher, as she then was, made no secret of her desire to alter the balance of political power by creating a “share-owning democracy”,6 with more shareholders than there were trade union members.7 This goal, too, was achieved. When the privatisation programme began, there were three million shareholders and 13 million trade union members in Britain. Today, there are almost 13 million direct shareholders, and fewer than eight million trade union members. Needless to say, the achievement of the Thatcherite objective of creating a new shareholding class did not ensure permanent Tory tenure at 10 Downing Street. But it may be one reason for the “New” in New Labour — the people may well be closer to controlling the commanding heights of the economy than they were when the several “barons” ran the nationalised coal and other industries.

It was the pursuit of the goal of creating a shareholder class that led to the underpricing of the shares of to-be-privatised companies. The theory was quite simple: underprice the shares of such enterprises as British Telecom and British Gas so that the small shareholders (the so-called “Sids”) to whom shares were allocated at the time of privatisation — allocation being necessary because the underpricing resulted in over-subscriptions — would immediately see the value of their shares rise. This would persuade them to become active capitalists in the future, and to support the free-market, low-tax and other policies of the Conservative Party. The fact that huge values had been transferred from taxpayers to shareholders8 was not deemed troublesome, and was anyhow remarked upon only by economist/quibblers whose voices were drowned out by the clanging of tills in the offices of investment bankers and the cheers of new shareholders. Not to mention the applause of the managers of the newly privatised enterprises, men (almost no women) who suddenly realised just how valuable they were, and proceeded to adjust their compensation accordingly, this being a time before shareholders became somewhat more aggressive in attempting — so far with only indifferent success — to relate compensation to performance.

To the ideologue — and I include myself in the group of those who think that taking away from government those things that can be done by the private sector is intrinsically a good thing — privatisation, then, was a success. It pushed back the frontiers of the state. It reduced the power of ministers over many industries. It created a new class of shareholders.

To the economist, too, privatisation was a success, although it must be noted that the evidence concerning the economic differences between the efficiency of various industries when in state ownership, compared with performance after privatisation, does not point unambiguously in one direction.

That evidence is in any event not easy to appraise. For one thing, it is somewhere between difficult and impossible to separate the effects of privatisation from the effects of such things as trends in the economy. For another, measuring productivity remains more art than science, as those now engaged in the debate over whether we have a “new economy” or merely the same old one in the midst of a productivity-enhancing cyclical upturn are finding out.9 Most important, “It can be argued that the degree of product market competition and the effectiveness of regulatory policy typically have rather larger effects on performance than ownership per se.”10 So, simple before-and-after analyses of labour or total factor productivity cannot be considered dispositive.

Which is why a survey of the literature throws up some evidence that challenges the proposition that privatisation resulted in important improvements in efficiency. David Parker, reviewing several studies that compare the performance of public- and private-sector companies reports, “It is difficult to see what general conclusion can be drawn from this record.”11 Michael Pollitt, comparing the pre- and post-privatisation performance of several firms, concludes, “Privatisation itself does not seem to be associated with an acceleration of productivity growth or profitability.”12 The key word here is “itself”. It seems that it is the introduction of competition where that is attainable, and efficient regulation where elements of natural monopoly remain, that account for the improvements in efficiency that followed the entry of several firms into the private sector.

But it must be remembered that the liberalisation of many of the markets occurred precisely because the government no longer had a stake in preserving the monopoly positions of the one-time nationalised firms once they were no longer state-owned. So, although competition or regulation produced the efficiency gains, the privatisation of the enterprises was a necessary predicate to the introduction of competition where feasible, and regulation where necessary. In fact, it might be well to think of the history of these firms in three phases.

As state-owned enterprises: The firms looked to the government to protect them from competition and to subsidise them when they couldn’t cover their costs.

As firms operating during the period immediately preceding privatisation: The government was seeking to maximise the value of the enterprises’ shares, to the extent that was consistent with its desire for widespread share ownership. It therefore had a continued stake in preserving some of the monopoly protections enjoyed by the firms — the grant of so many Heathrow slots to BA is one example, the preservation of British Gas’s vertically integrated structure is another, the preservation of BAA’s monopoly of airports serving London — and in promising that regulation would be merely “light-handed”.

As firms operating after privatisation: The government generally came to realise that if consumers (“voters” in the politicians’ jargon) were to get some semblance of value for money, and something approximating a quality service, competition or effective regulation was required.

And it does seem to be the case that once competition and/or effective regulation was introduced, performance improved markedly. Real operating costs declined at a compound annual rate of 3.7% in the water industry, 4.1% in the sewerage industry, 6.5% in the transmission of electricity, 6.8% in electricity distribution, and 9.1% in gas transportation.13

But I hasten to emphasise again that the literature is not unanimous. Indeed, the very report that I have cited includes data that show that the rate of increase in total factor productivity of several privatised companies declined after privatisation.14 My own conclusions after a meander through the literature, and first-hand observation of some industries are as follows:

Privatisation was the first step on a long road to improving the efficiency of the nationalised industries.

In many cases the road was made rockier by the government’s failure to consider the form of privatisation that would most likely maximise competition and minimise the burdens placed on regulators.15

When competition or effective regulation was introduced, many dimensions of performance improved. These gains included better financial performance,16 a reduction in overmanning , and an increased responsiveness to customer demands, either because competition induced it, regulators mandated it, or government ministers changed from industry protectors into industry critics.

An important aspect of privatisation has been the conversion of managers from agents acting for their government departments to agents acting for their shareholders; the substitution of options and bonuses for honours as a motivating force; and the substitution of capital markets for ministerial largesse as a source of capital. An electric supply industry beholden to the government for funds was certainly more likely to make a deal to sustain inefficient coal producers than one subject to the discipline of capital markets, although vestiges of the old pressure to protect mining jobs certainly remains, at a high cost to the environment and the efficiency of the supply industry. A telecoms CEO who has to please investors is likely to behave differently and to hone different skills than one whose goal is to please ministers, although the increase in efficiency, profitablity and quality of service may be some time in coming.

Perhaps the best current example of the difference between private and public sector operation is provided by the media industries. BBC, admittedly woefully inefficient, and steadily losing market share, is rewarded by government with an increased flow of funds confiscated from tax payers, despite its clear dilution of its public service broadcasting obligations, and a drive to expand in areas where no market failure can be found to justify such expansion. Efficiency is unnecessary; clear corporate goals are unnecessary; satisfying viewers is unnecessary. Indeed, even cocking a snook at the responsible minister proves no impediment to unlimited funding.

Contrast that with a private sector broadcaster. A performance such as that of the BBC would result in reduced access to funds, another way of saying that funds would gravitate from the company that failed to satisfy viewer needs and wants to those that succeed in doing so. Economists call this the more efficient allocation of capital.

As I have already pointed out, privatisation was a necessary but not sufficient condition for the attainment of these gains. True, as a matter of theory some of the advantages of privatisation– reliance on capital markets, creation of incentives for managerial and worker efficiency — might be obtained within the nationalised structure. But history suggests that these advantages were not often achievable in practice, although where competition was introduced nationalised companies did respond by becoming more efficient.17 And the history of these companies since they entered the private sector encourages the belief that privatisation was indeed a key factor, if for no other reason than it set the stage for a more competitive or more effectively regulated industrial environment.

Which brings me to the next phase of this paper. I would like to take the few remaining minutes to appraise the way in which regulation and competition have developed in the industries that were once state-owned. This appraisal starts with a bias, and proceeds to a set of impressions — no claim is made for the systematic or scientific nature of what follows.

The bias is this: competition does a better job than regulation in producing a variety of goods and services, at prices that are most closely related to costs that are themselves minimised by competitive pressures. All of you are familiar with the virtues of competition as set forth in the various economic text books to which those of you fortunate enough to have studied the dismal science were exposed in your formative years; I need not repeat them here in any detail. Competition in product markets forces firms to give consumers what they want at acceptable prices; it allocates capital and other resource to their best use; within any given distribution of income, it maximises welfare; and it creates a fairer and more stable society, one in which opportunities to exploit one’s talents are not foreclosed by monopoly power.

That is why attempts to regulate industries in which effective competition is possible — either because of the notion that competition would threaten product quality, or safety, or produce unacceptable discrimination among customer classes, or prevent the subsidisation of groups favoured by politicians — have generally produced disastrous results. As Alfred Kahn has put it in his discussion of “the deregulation revolution” that has swept through America’s airline, trucking and bus industries, its stock exchange, and to some lesser extent our cable industry:

“About most of these a consensus was already emerging in the early 1970s among disinterested students that regulation had suppressed innovation, sheltered inefficiency, encouraged a wage/price spiral, promoted severe misallocation of resources by throwing prices out of alignment with marginal costs, encouraged competition in wasteful, cost-inflating ways, and denied the public the variety of price and quality choices that a competitive market would have provided.”18

The appropriate public policy for these industries is relatively easy to arrive at — deregulate and rely on markets, preserved in their competitive state by a vigorous antitrust policy when necessary. It is when we have to deal with industries in which some mixture of regulation and competition is required — industries in which producers are not yet pure price-takers, or industries in which one horizontal level has natural monopoly elements — that the problems arise.

In such industries, complex judgements concerning when to intervene and when to leave things alone must be made. Regulators must decide: when a price run-up constitutes the manipulation and the exercise of market power and when it merely reflects supply and demand conditions and the responses to them of competing sellers; when vertical integration will reduce transactions costs and generate savings that will be passed on to consumers, and when it will create distortions at other horizontal levels of the industry; when intervention in response to short-run problems such as price “spikes” is appropriate, and when such action will create long-run disincentives to new entry; and when mandating access to bottleneck facilities will increase the rate of innovation and the pace of new entry, and when it will discourage investment in such facilities.

In these instances in which the regulator must balance his desire and the pressure upon him to intervene against that small, inner voice that attempts to remind him what he has learned about the superiority of market forces, the temptation to intervene can become irresistible. Not for most regulators Ronald Reagan’s advice: “Don’t just do something, stand there.” As Kahn has put it, “In making complex judgments like these, the anticompetitive bias of the regulatory mentality has ample opportunity to manifest itself.”19 After all, if the regulator decides in favour of a monopoly structure as opposed to a competitive one, he in effect has created a chosen instrument to which he guarantees freedom from competition in return for obedience to his views on prices, the desired quality of service, and the social functions it should accept as part of the “deal” with the regulator.

It is the importance of what Kahn calls the regulator’s “mentality” that lends weight to my view that the quality of regulation is often a function of the quality of the regulator, and of the legislative tools given to him by the politicians. If the regulator has a bias in favour of competitive solutions, and if the legislative structure within which he must work permits him to exercise that bias, regulation is likely to work better than if these two conditions are not met. So let me spend a moment examining, first, the tools available to Britain’s regulators, and then the way in which the regulators have used these tools.

The tools: It must be remembered that when it launched on the programme of privatising firms that were to retain substantial monopoly power, Britain had no significant experience with economic regulation or regulatory agencies on the scale that privatisation would necessarily engender. All talk was of “light-handed regulation”, of tiny regulatory bodies with small budgets and few in staff, and of avoiding “American-style adversarial litigation”. Such was the stuff that Tory dreams were made on.

In the event, the government was heading down a path that would involve the creation of an entire new branch of government, agencies with enormous power over the fate of key industries and over the prices that consumers would pay for important necessities such as water, electricity and natural gas. Given the importance of the regulators’ missions, and what Sir Bryan Carsberg has called the “conflicting vested interests” that are inevitably involved20, it was somewhere between foolishness and wild optimism for the government to imagine that regulation is a process that can be performed by a few folks applying uncontroversial techniques to determine prices that will be fair to consumers and at the same time yield returns adequate, but no more than adequate, to attract capital in sufficient quantities to maintain service at acceptable levels.

The resources and tools bequeathed by the government to the regulators proved woefully inadequate, especially since the government paid little attention to the need to restructure the privatised companies so as to maximise the possibility of competition.21 The problem was compounded — and I say this with all respect to our chairman this evening — when antipathy towards “American-style cost-plus” regulation, as it was mistakenly called here, led to reliance on the RPI-X formula. I have elsewhere commented on the failings of that formula, and will repeat here only two points. No one knew how to measure and to forecast “X”, the anticipated cost savings due to greater efficiency. And no one anticipated the political consequences of a formula that placed no effective and visible constraints on the profits that a monopoly utility might be permitted to earn.

When the newly privatised companies proved capable of wringing cost savings far in excess of anything contained in the “X-files”, profits soared, in some industries at the expense of service quality. So regulators found themselves in the difficult businesses of trying to force prices down so as to contain profitability, and of developing efficiency standards, a chore carried out with a wonderfully optimistic view of the power of regression equations, and to its highest level of detail by the water22 and electricity regulators of those distribution networks.

This is not to criticise the individual regulators. In part, the evolution of the regulatory regime to something closer to the American model was predictable, and not a function of any failure on the regulators’ part to implement the unrealistic expectations that regulation could be kept to a minor chore. The regulators had been given flawed tools. They had to overcome a huge information asymmetry problem, most notably in the early days of the regulation of the vertically integrated gas monopoly that the government of the day had seen fit to unloose on an unsuspecting public and on under-resourced regulators; and they had to overcome the residual arrogance of the “barons” who ran the state-owned companies and, backed by the trade unions, were accustomed to having their way with mere ministers and parliamentarians, not to mention regulators. Which brings me to my final subject: the regulators.

The regulators: The amazing thing to this long-time observer of the regulatory process in your country and mine is that the entire system did not collapse. The agencies responsible for regulating these key industries did not have adequate resources; the companies they were asked to regulate were not in a cooperative mood and proved unwilling to share data or concede that regulators had a legitimate role to play; the formula on which regulation was to be based was flawed.

Yet here we are, in the twenty-first century, with regulated utilities that are somehow continuing to function, and regulatory agencies that have grown in expertise. This is in large measure because, as I mentioned earlier, the people who get these jobs matter, and Britain has been fortunate in its selection of regulators. They have been truculent when necessary, attempted to maximise the scope of competition23, and wrestled with difficult conceptual problems with some success. It would be out of character for me to heap undiluted praise on regulators, so I must add that their performance has not been without its flaws: the water industry may be suffering from overly constrained revenues; the electric industry is at the mercy of a regulator who believes he can separate good behaviour from bad; the telecoms industry has not opened up to competition as rapidly and completely as some would like. But all in all, given the difficulty of the chore of creating what is indeed an entirely new branch of government, it is fair to say that Britain’s regulators should be given good marks, as I believe you say in this country.

Oddly, this seems to be truer of those regulators charged with overseeing the monopoly utilities — electric, gas and water distribution — than of those responsible for industries in which competition is more feasible. In the “wire industries” — cable and telephony — regulators have been reluctant to mandate the open access that is necessary to break the competitive “bottlenecks” that incumbents have set up. I recognise that the advantages of open access have to be weighed against the possible disincentive such access creates to investment in new facilities.24 And that there is not unlimited capacity in the buildings of incumbent telephone providers to accommodate new entrants. But a re-examination of the balance being drawn between the desirability of lowering entry barriers and treating incumbents fairly might just produce a greater tilt in favour of more rapid market opening.

In the highly competitive broadcasting industry, where competition is distorted by the amazing ability of BBC to extract ever-larger sums from taxpayers in pursuit of an ever-expanding role, and by generous spectrum grants to chosen instruments to the disadvantage of potential entrants, and where cultural considerations inevitably affect regulatory decisions, regulators nevertheless have greater freedom than they have chosen to exercise in promoting competition. Instead, we see a web of regulations stupefying in their complexity, often based on economically illiterate definitions of relevant markets, and aimed at favouring this or that competitor. Perhaps the White Paper that is due out this week will take a scissors to all of this red tape and nonsense, and remove impediments to the rapid development of the new technologies that hold such promise. And perhaps some guidelines will be established to limit BBC to specified areas, and thereby prevent that organisation from continuing to use the hoary anti-competitive tactic of pre-announcing services to discourage potential entrants.

Let me conclude with a thought on where the regulatory regime might go from here. First, all regulators should concentrate on getting the incentives right: you cannot create an incentive for punctuality by fining operators for late arrivals of trains, and hope that they will not respond by elevating punctuality over safety. You cannot induce efficient overall performance by creating incentives to lower one set of costs, and hope that the regulated companies will not meet that goal by incurring higher costs in other areas of their operations.

Second, where competition exists or is possible, the regulatory burden should be reduced. Note: the long arm of the regulator remains necessary where the invisible hand does not operate. But in other places, every effort should be made to substitute competition for regulation, including in the so-called “network industries”, in which natural monopoly elements are of “diminished significance” and in which “encouraging competition generally leads to greater dynamism and welfare gains.”25

Third, regulatory procedures must be improved. In many instances they lack sufficient transparency; regulators do not adequately explain the basis for their rulings; there is no adequate appeals process that provides regulated companies with an alternative to the often-hostile staffs of the regulatory agencies.

Finally, in the telecoms/media area overlapping, multi-forum regulation must be rationalised. But that is a topic for another evening, after we have seen the government’s White Paper.

Thank you for your attention.

* Not all state enterprises need be monopolies; liberalisation, i.e., competition, is possible without privatisation; competitively structured industries are sometimes regulated. But this paper deals primarily with the privatisation of enterprises that are monopolies at the time they pass from state ownership.

1 For a discussion of these costs see Peter Self, Rolling Back The Market: Economic Dogma & Political Choice. London: Macmillan Press, 2000.

2 Alfred E. Kahn, The Economics of Regulation: Principles and Institutions. New York: John Wiley & Sons, 1970 (Vol. I) and 1971 (Vol. II), pp. 325-326 (Vol. II). Reprinted in a single volume by The MIT Press, Cambridge, in 1988.

3 Thomas K. McCraw, Prophets of Regulation. Cambridge, Massachusetts: The Belknap Press of Harvard University Press, 1984, p. 303.

4 Michael G. Pollitt, “A Survey of the Liberalization of Public Enterprises in the UK Since 1979,” Department of Applied Economics working paper, January 1999, p.1. The most notable remaining public enterprises are the Post Office and the London Underground.

5 David Parker and Stephen Martin, “The Impact of UK Privatisation on Labour and Total Factor Productivity,” Working Papers in Commerce, The University of Birmingham, 24 November 1993, p. 2.

6 Seth Thomas, “The Privatisation of the Electricity Supply Industry”, in John Surrey (ed.), The British Electricity Experiment. Privatisation: The record, The Issues, The Lessons. London: Earthscan Publications Limited, 1996, p.41.

7 “The encouragement of share ownership, especially by company employees, was another manor goal of the program…”. John Vickers and George Yarrow, Privatisation: An Economic Analysis. Cambridge, Massachusetts: The MIT Press, 1988, p. 159.

8 Discounts, the difference between the price at which the government sold the shares of “the major natural monopoly privatisations” and the prices at which they were initially quoted ranged from 20% in the case of power generators to 86% in the case of BT. Mike Wright and Steve Thompson, Divestiture of Public Sector Assets,” in Peter M. Jackson and Catherine M. Price (eds.), Privatisation and Regulation: A Review of the Issues. London and New York: Longman Group Limited, 1994, p. 55.

9 In this connection, see my “Crash or Boom? On the Future of the New Economy”, Commentary, October 2000, pp. 23-27, and several recent studies by Goldman Sachs.

10 Vickers and Yarrow, op. cit., p. 3.

11 David Parker, “Nationalisation, Privatisation, and Agency Status Within Government: Testing for the Importance of Ownership,” in Jackson and Price, loc.cit., p. 150.

12 Op. cit., p. 23.

13 European Economics, “Review of Railtrack Efficiency”, 9 December 1999, p. 15.

14 Europe Economics, op.cit., p.18. That may, of course, have been the consequence of a pre-privatisation spurt in efforts to spruce up these firms’ performances in order to increase their market values. Parker and Martin found that “in most cases a performance improvement occurred in the run-up to privatisation, suggesting rationalisation by management in anticipation of having to survive in the private sector.” Op.cit., p.19.

15 In this connection see, for example, Colin Robinson, “Privatising the Energy Industries: The Lessons to be Learned,” Metroeconomica, Vol. XLIII, Nos. 1-2, February – June 1992; and Robinson’s “Profit, Discovery and the Role of Entry: The Case of Electricity,” in M. E. Beesley (ed.), Regulating Utilities: A Time For Change? London: Institute of Economic Affairs, 1996. “In electricity, as in other privatisations, a good idea has been imperfectly executed.” (p.109).

16 Pollitt, op.cit., p. 23.

17 For example, the Post Office seems to have gotten more efficient as competition became more intense. “We found that when the competitive environment became tougher, tfp [total factor productivity] increased significantly. Strikingly, this was as true of those firms which have remained in public ownership, notably the Post Office, as for those that have been privatised.” Matthew Bishop and Mike Green, “Privatisation and Recession – The Miracle Tested,” Discussion Paper 10. London: Centre for the Study of Regulated Industries, 1995. p. 33.

18 Introduction and PostScript to the 1988 reissue of The Economics of Regulation, p. xvi.

19 Op. cit., Vol. II, p. 114.

20 Bryan Carsberg, “Injecting Competition Into Telecommunications,” in Cento Veljanovski (ed.), Privatisation & Competition: A Market Prospectus. London: Institute of Economic Affairs, 1989, p.81.

21 “It would have been possible, for instance, to have split British Telecom into a number of separate enterprises or … to have sold the UK’s two major international airports separately rather than privatising the British Airports Authority intact.” Michael Fleming and Kenneth Button, “Regulatory Reform in the UK,” in Kenneth Button and Dennis Swan (eds.), The Age of Regulatory Reform. Oxford: Oxford University Press, 1989, p.92. And there was no need to sell off British Gas as a vertically integrated monopoly, sowing the seeds for future regulatory problems.

22 The water industry provides a good example of the problems, as a reading of Ofwat’s 1999 Periodic Review. First, the underestimation of potential efficiency gains:: “Since the 1994 price review, the companies have significantly outperformed the Director’s expectations about how efficient they could become.” (p. 27.) Then: profits hit unexpectedly high levels: “The rates of return on capital have been high…”. (p. 31.) Then the inevitable over-reaction, driving profitability down to the point where several companies are attempting to extract their remaining equity capital from the industry.

23 Many of Britain’s leading regulators have been devoted to competitive solutions. “Whenever I become aware of a problem …I ask first whether the problem can be alleviated by bringing about more competition or better competition.” Carsberg, op.cit., p.82. “Competition, whether existing or merely potential, is a vital protection for consumers against … higher prices, lower quality of service and reluctance of service and reluctance to innovate.” S. C. Littlechild, “Ten Steps To Denationalisation,” in Veljanovski, op. cit., p.18.

24 For a concise discussion of the question of access, especially in the context of vertical integration, see Lars Bergman et. al., Europe’s Network Industries: Conflicting Priorities. London: Centre for Economic Policy Research, 1998, pp. 24-27.

25 Bergman et. al., op.cit., p. 39.