Public Ownership Regulation

As outlined above, a principal function of economic regulation is to offer a substitute for missing competition under natural monopoly conditions. There are basically three ways of regulating market failures caused by private monopolists: first, through public ownership of the monopolistic company. Public ownership fulfils the same functions as classic regulatory intervention in an otherwise free market, i.e. through rules, laws or controls of private companies. As Majone (1996: 54) outlines, “in Europe nationalization has been the functional equivalent of American-style regulation, at least in the case of natural monopolies”.⁴⁶ The expectation is that mechanisms of political control and accountability will lead to the pursuit of public interest goals (Swann 1988: 75-85;

asymmetric cost advantages compared with potential entrants. This is only the case if sunk costs and, hence, the costs of entering a market are relatively low. Sunk costs are represented by those specific investments or expenditures which cannot be recovered if a company goes out of business. Thus, high sunk costs will fend off new competitors and thus create the problem of uncontestable markets in infrastructures. If, in addition to high sunk costs, by-pass technologies of the same or a superior quality are not available to potential new entrants, for example mobile or satellite telephony in the telecommunications sector, a regulated monopoly is the only appropriate answer (Welfens 1999: 18).

46 The telecommunications sector in the United States has since its existence been organized on the basis of private ownership. The dominant operator AT&T first began as an unregulated company but was later regulated (Schneider 2001a: 90-92).

Waterson 1989: 64-65). Regulation through public ownership is implicit rather than explicit, nevertheless it is the most direct form of intervention in the economy.⁴⁷

A second possibility for the regulation of natural monopolies is that the monopolist remains in, or is transferred to, private ownership with optional liberalization and parallel regulation of access prices and quality. Such firms can operate under private law status but are subject to control by the government or a responsible agency. A third form of regulation is public franchise allocation. Companies ready to compete for a monopoly right are required to accept and fulfil certain conditions of supply (Ogus 1994: 5).

The discussion of the regulation of natural monopolies points to some of the economic characteristics of network infrastructures. Basically, these infrastructures possess the same distinct layers of business. As illustrated in Figure 2.2, these layers refer to the building infrastructure, operation facilities, network control and the provision of products and services. In principle, the last three business segments can be vertically separated because they are potentially competitive, i.e. the provision of telecommunications services or the supply of electricity. Since the physical infrastructure and the maintenance of network operations are very capital intensive there is a given interest of the network owner to ensure profitability of investment. As a result, in the past all four business layers were

47 As some authors argue, we have to distinguish between public monopolies and publicly owned enterprises in an otherwise free and competitive market. While state enterprises are subject to the rules of civil law, public monopolies replace the market system in a sector. From this, they follow that there cannot be regulation, “as regulation requires both a collectivist system (the state) and a market system (the respective sector or industry) which interact in certain ways” (Sturm and Müller 2000: 16). I believe that this argumentation is not correct for two reasons. First, a public monopoly does not, as claimed, entirely replace all characteristics of a market because there still exist private transactions on a supply and demand basis even after nationalization. Under conditions of public monopoly the fundamental logic of the market does not automatically seize to exist, although it is definitely concealed as state intervention takes its most radical and direct form. Although there is only one supplier there still remain typical market features albeit under monopoly conditions, i.e. price pressures caused by ‘contestable’ markets. In fact, any market is contestable up to a certain degree so that private social interaction and efficiency concerns can be stimulated (cf. Baumol, Panzar and Willig 1982). Thus, a monopoly is simply a distinct market form as is a duopolistic, oligopolistic or competitive market. Second, at the beginning of the twentieth century regulation through price and quality controls already existed in several sectors. In course of large-scale nationalization programmes after the Second World War these legal forms of intervention were eliminated and replaced by direct governmental control and political accountability. Today, we experience a trend back to some of the regulatory instruments that had already been used before the nationalization wave. Public monopolies therefore constitute a distinct form of regulation, albeit with other means, and it is thus incorrect to judge their existence as an absence of regulation.

usually vertically integrated under the roof of the same public infrastructure company (Welfens 1999: 15).

Figure 2.2 Layers of Infrastructure Business

The central argument for public ownership in network infrastructures was based on the assumption that the adverse consequences of a monopoly can most effectively be dealt with under direct state control rather than through legal controls of companies that pursue private interests (Majone 1994b: 78). Hence, national monopolies were legitimized by the need to spread the costs of expanding the physical network as much as possible, by the provision of minimum services to all citizens and by the prevention of cream-skimming in lucrative market segments. The public telecommunications network, for example, was not only a techno-economic system, but also a socio-economic system that had as one goal the redistribution of benefits between the economically strong and the weak (Hulsink 1999: 6).⁴⁸

48 Especially problematic as regards natural monopolies is the problem of ‘cream-skimming’. In an unregulated market with free entry, suppliers which operate on a marginal cost basis would concentrate on those areas where costs of supply are lowest. It is obviously cheaper to deliver services to urban areas with a high level of demand than to weakly populated areas in the country-side. In certain infrastructures, i.e.

communications or transport, this would in consequence lead to a discrimination of prices and services:

consumers in the cities would have to pay less for the same service than those living in rural areas. In addition, without regulation cream-skimming might even deprive certain areas of basic services. State ownership can overcome these problems by supplying universal infrastructure services at an uniform price to the residents of all areas of a country. However, in order to deliver standard services at uniform prices, cross-Source: Welfens (1999)

Provision of Services Network Control Operating Facilities Building Infrastructure

The Public Sector in the EU

The key development in the regulation of network infrastructures was the expansion of direct state intervention after the Second World War. This expansion was mainly sparked by the growing impact of Keynesian ideas on economic policy-making. At the beginning of the 1950s, most infrastructure sectors were nationalized, that is transferred from private to public ownership. As the equivalent to American-style regulation, public ownership was supposed to protect the public against powerful private interests. As a consequence, the regulation of privately owned companies according to specific industry rules, as it was the case in many sectors before the war, largely disappeared. Instead, governments began to replace it by direct regulatory involvement through state ownership and public accountability.

Thus, at the beginning of the 1980s public ownership was most common among the network utilities and other natural monopolies, i.e. ports and airports (Short 1984: 124-142). However, when analyzing the development of the public sector in the individual member countries we encounter several different problems (cf. Gretschmann 1991). First of all, it is difficult to identify the actual size of the public sector because definitions of public enterprises tend to vary greatly across countries. It is thus hard to assess which activity actually belongs to the state and which does not. In some instances the state only holds minority shares but de facto controls the company, while in others it has majority shares but does not exercise corresponding control.

A second factor that complicates analyses of public ownership is industry structure.

In some countries large industrial holding companies used to control or still control the activities in the public sector. These holding companies sell off or acquire subsidiaries. In the past, this has often happened rather quietly, sometime even illegally, as in the case of the nationalisations silencieuses and the privatisations silencieuses of the Pompidou, Giscard d’Estaing and Mitterrand governments in France. In addition, direct state ownership is complemented by indirect forms. In other countries it is quite common that

subsidization becomes necessary. Regarded from a macro-economic perspective, this is allocatively inefficient. Basically, universal service provision can also be accomplished in the absence of public ownership through private industry structures linked with effective price and quality regulation.

the state holds stocks in infrastructure companies through national financial institutions (Vickers and Wright 1989: 4, 10). In Germany, for example, at the end of 2003 the Kreditanstalt für Wiederaufbau (KfW) held more than 16 per cent of Deutsche Telekom. A similar situation exists with the National Investment Bank in the Netherlands or the Société Nationale d’Investissements in Belgium.

Especially in Western Europe the expansion of public ownership was rooted in a variety of pressures emanating from governments, political parties, trade unions, business and financial interests or the civil society.⁴⁹ The consequence was that the public sector had to fulfil a wide range of different and often conflicting policy objectives. Since the Second World War, public infrastructure companies had in addition become important employers providing secure jobs that could be considered part of the ‘informal welfare state’ (Schwartz 2001). The ambiguity of goals continued to exist for many decades because “where conflicting and mutually inconsistent goals seem to exist, politicians may find it undesirable – even dangerous – to clarify the ambiguity” (Vernon 1981: 12-13).