Opening utilities to competition can be beneficial in terms of efficiency, but experts say certain factors must be in place, reports Niveen Wahish
Mention the private sector in connection with any public utility like water or electricity, transportation or telecommunications and everybody will be up in arms. People worry that private sector entry into these sectors will mean price hikes and monopoly. But that may not necessarily be the case. It all depends on the type of industry and which part of that industry is opened to competition.
The telecommunications industry, and the cellular telephony in particular, is one area where opening up competition has been beneficial, as studies on Egypt and in several parts of the Arab world have shown, notwithstanding some reservations. Amira Al-Haddad, associate professor of economics at Cairo University, presenting a paper to a seminar organised recently by the Economic Research Forum on Efficiency and Equity of Utilities in the ERF Region, showed that there have been gains from reforming the sector.
"There were marked improvements in access, in the overall price and quality of voice services, in overall employment, in average wages, in productivity indicators and in ICT sector transferred funds to the government," her study said. But she highlighted that there were many shortcomings as a result of what she called ad-hoc regulation. "It is important to have clear competition regulations prior to market liberalisation. However, that was not the case in the telecom sector where reforms have been carried out in the absence of competition regulation both in the sector and on an economy-wide level. In fact, competition regulations were not introduced until 2005, almost a decade after the telecom sector reform has started."
Nonetheless, opening up the cellular phone market may have been easier not only by virtue of being a new service but also because it is not a natural monopoly where it is most efficient for production to be concentrated in a single firm, Izak Atiyas of Sabanci University, Turkey, told Al-Ahram Weekly. He explained that it is simpler to regulate the mobiles industry because it can accommodate several players. The same would not apply to fixed telephony because of the high cost that it incurs. "It is very cost ineffective to put in copper lines to every single household. In a mobile network, all is needed are the base stations."
The same theory would apply to other sectors such as electricity. As Atiyas pointed out, there are segments of the electricity industry that are competitive and other segments that are monopolistic. For example, electricity generation is potentially a competitive segment that can accommodate more than one player. Competition will mean better service and reduced costs. On the other hand, electricity transmission is a natural monopoly. In Atiyas's opinion, "transmission should be kept under public ownership, with good public servants and with good management. This is the best way to go for the sake of consumers because once transmission is privatised, one player in the industry gets tremendous market power."
As for the distribution of electricity, that too is a natural monopoly, but Atiyas believes that it can either be kept under the government or opened to competition provided market power is curtailed through regulation.
"If there is a very strong, very effective regulator, then it can be liberalised, but if the regulator is weak, then it should be kept under public ownership," he said.
Al-Haddad agrees. She believes that every utility can benefit from competition because it introduces efficiency and lowers prices. "Competition will kick out anyone who does not perform," she said, adding that what is important is having a strong regulator not only to monitor competition in areas that have been liberalised but also to make sure that the incumbent in a natural monopoly is not abusing its position.
And to have a strong regulator, independence is paramount, according to Cairo University economics professor Ahmed Ghoneim. He lamented the fact that in Egypt, for example, the chairman of the regulator monitoring the water sector is also the chairman of the water companies, which is a blatant conflict of interest. Al-Haddad pointed to a similar situation in the telecommunications sector, where the chairman of the body regulating the sector is also the telecommunications minister.
According to Ghoneim, the government needs to correct this situation, especially as it might increasingly rely on the private sector in the utilities domain because it does not have the needed finance to make needed investments on its own.
In the meantime, Ghoneim recommended the establishment of a universal fund, like that in the telecommunication sector, to make sure there are enough funds to finance the provision of service to remote areas where it would not be viable for the private sector to invest. Al-Haddad adds that the government must also work on its redistributive policies through taxation and social transfers to offset any negative effect competition may have on the market.