Introduction
At an individual level,
spending on public goods (which includes public housing, public utilities,
public transport, public healthcare…etc.) constitutes an average of 80% of
one’s total life expenditure. In the
early years of modern economy, based on economy of scale and monopoly nature of
public goods, government attempted to provide these public goods. Unfortunately, governments worldwide failed
to provide public goods efficiently through the Nationalisation policy. The world’s advanced economies then swung to
the other extreme, delegating the task fully to the private enterprises through
the Privatisation of public organisations or statutory boards, where these public
organisations are incorporated as private companies with their ownership shares
sold to the general investors. Once, it
is a privatised company, its primary objective is profit maximization for its
private share owners. Privatisation was
first initiated by former UK’s Prime Minister, M. Thatcher in 1983 for Great
Britain, which was subsequently adopted by many advanced economies, including
Singapore. After thirty over years, privatisation
policy only produced limited success, failed to lower costs or improved
efficiency significantly due to the inherent market nature of public goods;
economy of scale and monopoly. Unfortunately, the Privatisation’s market asymmetry of information on costs and
possible alternative options will continue to disadvantage the public
consumers. To-date, no new or improved
policy framework has been developed to correct the inefficiencies of the two
extreme approaches.
At the national level, the efficiency
of providing public goods also affects a country’s performance directly and
indirectly. One example of direct effect
may be in a form of national electrical power outage, triggering stoppage of
businesses and possibly damaging also the production output. Example of indirect effect can be in a form
of delay in public mass rapid transport (MRT) service due to power failure. Due to the delay, workers will end up being
late for work, thus disrupting businesses, affecting efficiency.
In fact, public goods should
be termed as Social Goods[1] as these public goods that could be delivered
as private goods, though these goods were previously provided by the
government for various reasons; maximize social level of production at lowest
cost, national security, social policy and using public funding, like taxes and revenues from corporates and individuals. From here on, the term of social goods will
be used. Examples of social goods are public
housing, water, gas and electricity. Social
services are public healthcare, education, transportation, and telecommunication.
As social goods provision
constitute the largest economic activity and affecting one’s nation economic
performance significantly, it calls for urgent review of privatisation policy
as the latest privatisation approach has failed to deliver the optimum performance
expected.
To fully appreciate the conceptual development
of social goods provision, we start off with the understanding on why in the
early years, the government called upon herself to provide the social goods, followed
by looking into why the attempt by the government to provide public goods failed. Despite the introduction of the Privatisation
policy that is supposed to overcome the earlier government provision failure,
it did not achieve the expected success.
By looking at all the key factors affecting the two approaches, a new
effective approach may be developed to optimize the provision of social goods.
There are three main
considerations in the provision of social goods namely; the monopoly element in
these markets, the significant externalities that arise from the provision of
these social goods (positive or/and negative types) and the effects on national
interests, besides the normal business consideration of productivity, cost
effectiveness and profitability.
One main factor that gives
rise to the monopoly is due to the markets’ nature of these social goods. These markets require large upfront
investment in the infrastructure with long payback period so as to take
advantage of the economy of scale in production. If privatised, the duplication in almost
identical infrastructure investment by multiple enterprises will greatly reduce
the return on investment for both the existing and the new entrants, thus
making it a non-viable business proposition for all. For
example, the current electrical power cable network and system throughout the
country has been put in place by the existing power supplier. Should a second firm seeks to enter the power
supply market after privatisation, it will be a massive and costly investment
while at the same time, it is very difficult to win over customers from the
existing power supplier as the price has to be lower, since there is no
significant product differences for the power supply offered. Even it succeed in winning over some
customers through price discounts, the profitability of both firms will be
compromised, due to excessive investment given that there is no change in the
total number of customers in the same market. At the same time, many private enterprises may
have overlapping coverage of the market which leads to redundancy. Should the firms keep to their niche areas,
the efficiency will be greatly reduced due to demand fragmentation. One example would be the cable TV network service,
where Starhub do not allow other firms to distribute their videos on the cable
network, thus leads to demand fragmentation. Due to the monopoly nature of social goods,
governments in the early years took upon themselves to provide the social
goods. To better appreciate the issue,
the economic analysis provided below helps to illustrate clearly the issue of
monopoly versus the social optimum level of production (or perfect competition
state) business outcomes.
Monopoly verses Social Optimum
Output[2] Chart
The economic theory of demand
and supply, and optimum production level remains a useful tool in analysing the
optimum allocation of resources in the provision of social goods (and
services). As shown in the above chart, to maximize profit, a privatised
monopoly firm will not produce beyond Qm
(monopoly level), much lesser than Qs, a socially optimum level (or perfect
competition level) where maximum possible goods are consumed at much lower
price.
Under a Monopoly condition, the monopoly firm
suppresses the output to raise price from the optimal social production level
to monopolist level so as to achieve their own profit maximization goal. As a result, the classical economics calls
for government provision of these social goods so as to enhance output to
optimal social level. Unfortunately, due
to the lack of competition, and lack of motivation of civil servants to be measurably
efficient in their efforts, it ends up increasing the costs of production which
again results in lower level of output from the optimal social level.
Neo-classical economists went to the other
extreme in calling for full privatisation of the social goods business as a
better alternative to the government-run organisation[1]. Private organisation seems to achieve higher
efficiency in the business process, thus allowing higher
level of production at lower costs, boosting the output level higher from the
government operated organisation, but NOT anywhere close to the optimal social
level, given their primary motivation of profit maximization. The key weakness of Privatisation is that it
ends up as oligopoly market where only few firms operate. Oligopoly has similar monopoly market
behaviour where these firms tend to produce and price their goods at the level
similar to a monopoly. The advantage of
oligopoly market is there is competition between these few firms, which tend to
lower their costs of operation, which often translates to slightly lower price
than a monopoly market. Nevertheless, it
is still far from the optimal social level of production. Privatisation also allows the widening of
income gap as the private owners of the monopoly or oligopoly firms enjoy
super-normal profits or commonly known as rent seeking profit. The moral hazard thus arises from this skewed
reward in favour of the owners of monopoly or oligopoly firms. The underlying
cause of Privatisation failure is that oligopoly or monopoly market structure still
prevails in the so call privatised social goods markets, even though it was
disguised as having market competition.
In the case of Singapore, the majority owner of these oligopoly firms is
the same entity, which effectively, a monopoly owner. In the case of the three main telecom
companies in Singapore, the majority owner is the same entity, Temasek Holdings.
The new framework calls for a
vertical disintegration of social goods business process
The proposed new framework in this paper
calls for a vertical disintegration approach to the whole business process in
the production of social goods, that is, to break-down the components of the business
process (which starts at management planning of the business to manufacturing
and maintenance, to distribution followed by sales service) to meet the demand
of the monopoly market. There is only a certain
component that is essentially monopoly by its market nature. The new framework seeks to provide the rationale
that the monopoly component should be invested and owned by the government
while those components of business process that are not monopoly in nature,
should then be privatised so as to enhance the efficiency. Due to the privatised components, it will
also pressure the monopoly component to match up to the privatised level of
efficiency, resulting in total efficiency of the full business process reaching
its optimal social level.
One good example is the
privatisation of Singapore’s energy market operator, which was previously owned
and operated by Public Utilities Board, PUB.
In their privatisation exercise, PUB, now known as Energy Regulatory
Authority, retains only full ownership and maintenance of the power grid and
sales services, while the production of electricity was privatised, resulting
in three privately-owned power stations in Singapore. These three power producers compete to offer
the lowest rate of energy charge to the whole Singapore market. Recently, further privatisation of the sales
function has been implemented.
The key issues relating to the components of Providing
Social Goods and Services to the public:
- Infrastructure
investment
- Infrastructure
ownership
- Core versus the
non-core infrastructure
- Infrastructure
operations
- Infrastructure maintenance
To add rigor to the evaluation process of what can and
what should not be privatised, we have to return to the economic theory of
incentives, or in business management term, adopting efficient and effective
decision process and also the issues that may arise due to the interactive
nature of each of the business processes or term here as business components. Key factors in business or economic decision
making that ensure efficient and effective outcomes:
1) Highest
motivation to make the best economic decision that achieve highest efficiency
2) Best
position and ability to access and assess the changing demands information
3) Best
skills to execute and manage the operations
4) Best
in minimizing negative or/and maximizing positive externalities
5) Technological
advances that can obsolete existing network or services
- Neutralising
Monopoly or Oligopoly nature of pricing
- The positive and
negative external economies of the infrastructure
- National
interests and security
Motivation Factor:
Civil servants in charge may not have the best motivation as generally
civil servants’ self-interests are often to keep things status quo and also to
avoid mistakes in making changes. Fortunately, these days, due to the active
citizenry, the failure to keep up with the changing demand will trigger
unhappiness of the civil bodies, holding the government in power accountable
for the short-comings. As such, the
government will put pressure on the civil servants to live up to the standard
of efficiency expected.
Best informed Factor:
The ability and the motivation to predict and assess the demand for the
infrastructure services are key in ensuring the effectiveness of the
decision. Government in their urban
planning is best positioned to anticipate the changing demand for the
infrastructure goods as they have access to the changing population
locations.
Best Skill Factor:
Due to the specialised nature of each of the social industries, there
will be limited availability of trained personnel and training program geared
for the specific social industry. The
challenge is to recruit and train personnel for the task. Each specific social industry may require specially
organised training so as to achieve optimal efficiency. On the other hand, those components of the
business process that are privatised usually do not require specific
training. General training will be
sufficient to achieve optimal level of efficiency, for example, sales training
where sales skills are generally applicable to any other industries.
Technological advancement and obsolescence: In certain social industry, technology may
not be evolutionary. When there is
technological quantum leap, the social goods may be best produced using the new
technology, but under private monopoly, the obsolescence cost may be too high
to write off, thus keeping the social goods provisions under continued
sub-optimal level. As government will be
able to write-off using public resources and take the leap, social goods will
then be ensured to be produced at new higher optimal level.
Neutralising Monopoly or Oligopoly pricing nature of the
market: Due to the likelihood of the
market, there is a need to maintain transparency and productivity, one of the companies
in the market has to be majority-owned by government. This will allow the government-owned company
to be able to price the goods that are truly cost neutral (where capital is
also priced in as costs of production) so as to suppress oligopoly
pricing. At the same time, the private
companies operating in the same market will also challenge the productivity of
government-owned company so as to ensure no “civil servants” mentality creeps
into the business processes.
Positive and Negative Externalities: As government will be able to assess these
factors, she also has the power to introduce laws and regulations so as to
reduce or offset negative externalities.
As for positive externalities, government is to capture the benefits and
reinvest into the related infrastructure and to bolster the government revenue.
National Interests:
For the critical industry or market of social goods, there is a need for
board representation, either by relevant regulatory body or through limited
ownership by government investment arm into all these private companies. This is to ensure the government is well
informed in advance of any possible compromise to national interest or
security. In the case of limited
ownership, there will be a pressure for government to yield maximum profit
which threatens to original objective of pure oversight of national interests.
Social Goods & Services Chart
The framework seeks to answer to the question of which
business component of each of the chart above that should be privatised or kept
in public ownership. For each cell of
???, we will use the most effective decision making/investment criteria to
evaluate and decide on the appropriate operations; private or public?.
In the subsequent sections,
the article will apply the above framework with current Singapore’s social
goods provision situation.
Since most advanced
economies have gone through with privatisation of the social goods provision,
the challenge is how the country is to regain control of the monopoly component
of each of the social goods market the government has sold out. By nationalising these
privatised companies, it will create a bad precedence and will dent the
investors’ confidence in the government handling of the economy.
By making an offer to buy the critical business component
from existing privatised social goods companies, the government will threaten
the privatised companies’ business viability, taking away their key competitive
advantage. As such, they will not sell
at normal market price, but at exorbitant level, which may not be in the
national interests to buy at such an exorbitant price. It may be worthwhile for the government to
look into technological leap phase of the social goods production where
government new investment will justify the higher returns from the investment
from simply buying old technology at over-valued price from the existing
privatised companies.
[2]
Social Optimum Output is at the Perfect Competition Level where there are many
suppliers and consumers such that none of these individuals is able to
influence the market. They are also
known as price takers, accepting the price level establish by the market.
[3]
https://mises.org/journals/rae/pdf/rae10_1_1.pdf
criticise government inefficiency in provision of public goods
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