I have written on this issue before but, again, here is an excerpt from my new work, to appear shortly.
The type of competition we choose to adopt among our concessionaires is important. In many submissions to the European Commission, I have favoured
competition ‘in’ the market, vis à vis competition ‘for’ the market, the latter
being the Commission’s preference, mostly based on arguments regarding market
size.
To explain. 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), whereby only one concessionaire is selected 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 favouring a specific
bidder (often the current incumbent), effectively shutting off international or
even national competitors. 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 statistically significant[1].
Finally, the opening of the market for public contracts is one area where WTO
is dragging its feet for years now, without much 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[2] and
the legitimization to decide themselves on the fortunes of private risk-takers.
The same is true when it comes to the efficiency of the regulatory role of the
public administration (port authority): often, the latter has neither the
professional competence (accounting, finance, etc.) nor the information and
statistics required to assess the highly complex accounts of the
concessionaire; accounts that, often, are submitted in purposely complex and
lengthy form, intended to confuse the assessor.
Instead, the role of the public
administration should be to set the rules of the game; to determine the
conditions and quality of the services 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 own’ decision, because
it is ‘their own’ money, and, in the end, ‘their own’ neck on the block.
HH
[1]The Economist (2016). Rigging the bids. Nov. 19, 2016.
[2]Akerlof,
G.A. (1970). The Market for “Lemons”: Quality, Uncertainty and the Market
Mechanism. The Quarterly Journal of Economics, Volume 84, Issue 3,
August 1970, Pages 488–500. https://doi.org/10.2307/1879431.
