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...
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