Failure of PSU monopolies

In a recent article on public sector monopolies --Who needs competition?-- T C A Srinivasa-Raghavan has expressed the view that the case against public sector monopolies is far from proved.

His view is based neither on analytical arguments nor empirical evidence but merely on anecdotes and personal experience.

The argument in favour of competition is not that competition leads to optimal and monopoly to inoptimal outcomes as Srinivasa-Raghavan seems to argue. Either can be optimal depending on the context. It is well known that competition cannot work in the case of natural monopolies.

Nor does the concept of competition mean perfect competition or equilibrium conditions. It is the process of competition and contestability that leads to better outcomes for the society.

Competition is deemed superior in general because it enables both the producers and consumers to seek and exploit opportunities for gain. Producers cannot be passive suppliers in a competitive environment but they have to put in active efforts to have sustainable and rising demands for their products.

Their active efforts include lowering of costs and prices, offering better quality products and so on, which benefits the consumer.

Price and quality, for any given product, depend on scale and technology -- the basic and interrelated parameters. It is the interface of scale and technology that sets the right degree of competition (number of suppliers) for any product.

It is the right degree of competition and not competition as such that is important as too much competition makes producers unviable, which goes against the long run interest of consumers, and too little competition makes them lethargic and insensitive to consumers.

The right degree of competition evolves over time in the market (provided government does not interfere with adjustment process) and cannot be decided a priori. That is why one finds various shades of oligopolistic competition including natural monopolies in the real world.

As regards public ownership and performance, the French example may be mentioned. Unlike most other developed nations, France gave a greater role to public sector.

Most of the public utilities such as metro and electricity are provided by public sector monopolies and they are doing very well in all the parameters of price, quality and supply (electricity tariffs in France are said to be the lowest in Europe).

The reason, which I came to know during my recent visit to Paris, is that French public sector entities managed to secure autonomy, especially freedom, in deciding the technical issues, although they are not totally free from interference by the political bosses.

In contrast, political-bureaucratic interference in Indian public sector enterprises has been pervasive. The result has been that Indian public sector enterprises failed to satisfy either equity or efficiency objectives.

Satisfaction of the increasing demand can be the basic and best benchmark in a situation of market shortages (Srinivasa-Raghavan ignores it simply by saying capacity expansion is constrained by low investments but not deliberately).

The price, quality of goods, and so on, come later. In this basic respect, all Indian public sector monopolies failed miserably. One can provide numerous counter examples in this respect but I'll stick to Srinivasa-Raghavan's examples just to show where they failed and how fatal the failures are.

The Indian railways, despite its continuous expansion of coaches/trains, has to go a long way to provide seats a few days before one plans to travel.

Currently, one has to book the ticket long before (two months in times of summer vacation) to be able to ensure reservation of a berth for long-distance trains.

Despite this one has to suffer equal number of unreserved passengers blocking all the way, including the entrance points to bathrooms if one travels by ordinary second class. Coming to technology usage, the number of functions that are still manually-operated are still far too many, and thus, prone to human errors, the most cited reason for the accidents.

Competition from the private airlines -- Jet and Sahara -- has also disciplined airlines in the country (Srinivasa-Raghavan ignores this factor while commenting on the punctuality of Indian Airlines). He could recall that the situation was different when Indian Airlines was operating as monopoly.

The state electricity boards could neither provide access to electricity for the entire population nor could they satisfy the entire demand of the population that has access to electricity till now.

A fact well reflected in the expanding market for inverters and generators and also the increasing number of business entities going in for captive power plants that hike costs, thus, reducing their competitiveness.

With the ill-conceived cross-subsidies that could not satisfy any segment of customers, these boards are incurring heavy losses.

While disregarding quality in other public sector monopolies, Srinivasa-Raghavan is bothered about the value-added services of private telecommunications. Access to basic mobile services has been greatly facilitated by competition.

When public sector monopolies could not do much in 50 years, expecting the regulated private companies, which still operate in a controlled competitive environment to succeed immediately is too much.

For me, the failures of public sector monopolies stood proved long time back. That India still does not have adequate infrastructural facilities even after 50 years is proof enough.