Tuesday, December 20, 2016

On public contracts in ports, natural monopolies and supernatural nonsenses

Ports are often referred to as the classic example of the so-called natural monopoly case, whereby possible market failure can justify government intervention. Under certain conditions (level of demand, cost structures and technology), a market with two or more firms can produce sub-optimal economic outcomes (for example a certain port may be too small to have two tug operators), whereas a single firm might produce the required output more efficiently. For this reason, governments often decide to move away from a multi-firm competitive environment (competition “in” the market), towards a monopolistic, albeit regulated, situation (competition “for” the market), achieved (sic) through competitive public tendering. 

I have always argued that such public intervention in commercial decisions is wrong. And it is wrong for two reasons. 

First, the sometimes widespread corruption in the public sector may result in ‘photographic’ tenders favoring the local incumbent, effectively shutting-off international or even national competition. Thus, it is not uncommon for public tenders to end up with only one interested bidder, while the correlation between ‘single-bid’ contracts and corruption in the public domain is not passing unnoticed either (Figure). Finally, the opening up of the market for public contracts is one area where WTO is dragging its feet for years now without any progress. 

Second, governments, and the public administration by and large, are by far the least competent actors to decide on ‘market size’, or on the financial ramifications for private firms who would like to take calculated risks and enter a market. This is because governments lack both the information required for such decisions (a typical case of asymmetry of information), and the legitimization to decide themselves on the fortunes of private risk-takers.[1] 

Instead, the role of the public administration is to set the rules of the game; determine the conditions and quality of service it requires (including any Public Service Obligations) and then leave it up to the private sector to decide for themselves if the market is big enough, if they see profit prospects, or if they would like to go bust; but this ought to be ‘their’ decision, because it is ‘their’ money, and ‘their’ neck on the block.

HE Haralambides

[1] A notorious case, immediately overruled by the State Council, was the communist (sic) Greek government’s decision, in 2016, to limit the number of national TV stations to 4, on arguments based on the ‘financial survivability’ of broadcasters, given the size of the advertising market...