Deregulation brings the benefits of competition
Sir, Of course Tim Harford is right in suggesting that solutions to economic problems seem to change with the times (“The pendulum swings against privatisation”, September 30)), but I think he has conflated the benefits of privatisation and deregulation (aka “competition”).
Governments privatise because: they have an ideological aversion to public ownership, they want to monetise assets to fill a hole in the budget, they expect the privatised company to make decisions that the politicians do not have the guts to make, or they believe that private owners will do a better job. I leave the reader to sort out the priorities, but suggest that government-controlled companies can run efficiently and commercially if allowed to and consumers are not necessarily the beneficiaries of privatisation.
Deregulation produces benefits when a grossly inefficient previously (or still) state-owned entity has to shape up to fend off competitors, or when restrictive rule designed to protect some market participants from others or to deter new technologies are lifted. But competition also raises the cost of capital, a fact rarely mentioned during the glory days of deregulation. To maintain a sustainable business that also delivers benefits to consumers, operating efficiencies induced by competition need to exceed the increase in cost of capital. If the asset remains regulated, then consumers have to depend on the regulator.
In the past, the Financial Times’ favourite editorial adjective to describe UK regulators seems to have been “feeble”, so the question is: did operating efficiencies induced by price cap regulation exceed the extra returns earned by the utilities?
Leonard S Hyman
Sleepy Hollow, NY, US
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