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. 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 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.
The Economist (2016). Rigging the bids. Nov. 19, 2016.
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.