Tuesday,17 October, 2017
Current issue | Issue 1298, (2 - 8 June 2016)
Tuesday,17 October, 2017
Issue 1298, (2 - 8 June 2016)

Ahram Weekly

Editorial: Monopolies and subsidies

Al-Ahram Weekly

In principle, subsidies are an evil. This applies to those aimed at producers and consumers alike. It is not a grant that the government hands out for free to some beneficiaries. It is a cost borne by taxpayers and those deprived of the government resources allocated for subsidies.

But since some of these subsidies are necessary for social and developmental reasons, at least their scope should be narrowed as much as possible and policies should be reviewed at periodic intervals to reassess their efficacy, levels and the continued need for them.

In this regard, there is nothing wrong with the government’s current review of electricity and water consumption rates and train and metro fares, with an eye to curbing subsidies and enabling important public utilities to improve their efficiency.

As the costs of operating these services are much greater than the income they generate, price hikes are necessary to strike the needed balance. This is the chief argument that is commonly cited in defence of new pricing policies. The argument is valid, but only partially so.

Public opinion, taxpayers and beneficiaries of these services know very little about how the costs of operating these utilities are calculated, or the economic effects and impacts on costs, in particular, of such factors as undertrained or excess labour, imbalances in pay scales and excessive perks and benefits, and various forms of waste that come from poor performance and corruption.

Water, electricity and our railway services are all monopolies. People have to deal with them regardless of the standards of performance, the quality of service, or the prices they have to pay. There are no alternatives and hence no competition. That industrial and commercial monopolies harm the economy and the welfare of the people is an established fact.

Holding a monopoly on some activity or commerce protects the holder from competition and the types of pressures that come with competition: pressures to develop products, to increase production, to lower costs, to improve the quality of services.

Worse, in the absence of competition, quality declines, production costs increase, the prices of products climb, and the quality of services provided to the consumer deteriorate because, ultimately, the consumer is trapped. Monopolisers know this. They have a guaranteed market for their products as consumers have nowhere else to turn, regardless of the quality of the services they are receiving.

This is why governments promulgate antitrust legislation and laws to penalise monopolistic behaviour and to ensure that fair competition prevails as the governing principle of all economic activity. Yet there remains the problem of how to deal with monopolies that emerge almost naturally in spheres of activity where competition is virtually impossible. Electricity generation and its distribution through a national grid, water supply and purification, the national rail service and land communications are all areas where this applies.

Most experts are of the opinion that in such cases where monopolisation is natural or unavoidable the best solution is for such activities or concerns to be state-owned. This, as we know, is the principle applied in Egypt. But a state monopoly over a public utility is no guarantee that the ills of monopolisation will be avoided.

In fact, the situation could compound the problem or substitute the problems of private-sector monopolisation with the familiar ills of government bureaucracy, such as poor efficiency, wasted resources, poor quality control and follow-through, widespread nepotism and other such factors that increase costs.

Meanwhile, the people are still forced to deal with the state-owned utility and put up with price hikes every time the government brings accounts under review, calculates costs and revenues, and tries to trim subsidies.

The performance of water and electricity services has improved greatly over previous years. Unfortunately, this cannot be said of other state monopolies, especially the national railway, which has sunk to an intolerable level of deterioration. Many indicators reveal that the railway service is plagued by mounting costs due to wasted resources, incompetence and corruption.

Other indicators suggest that improvement in the performance of national water and electricity companies is linked to higher costs that, in turn, are linked to higher wages and benefits. In fact, employees in these companies are regarded as lucky by their colleagues elsewhere in the government and public sectors. It is also said that you need to have very good connections or to pay a large bribe to get a job in these companies.

A system to monitor and assess performance in public sector companies does exist. But the system is far from sufficient when it comes to state-run monopolies. Profits and capital returns are a good way to gauge the performance of public sector companies that compete with private sector or other public sector companies operating in the same field.

Thus, we have learned that the government-owned textile companies are losing money and, indeed, failing, and that government-run cement and steel companies are being run less efficiently than their private-sector counterparts. In the case of the national railway, it is competition from other means of transport that has exposed the failure and poor management of this important service.

But what about the water and electricity companies that face no competition of any sort? We might be able to gauge their performance in terms of the availability of their services, but we cannot really gauge how effectively they manage their resources or how free they are of the ills of government bureaucracy and corruption, the consequences of which consumers will increasingly have to bear if subsidies are cut back.

Clearly, there must be closer oversight of state monopolies. This requires new legislation to establish rules for performance assessment and to designate the authorities that will be in charge of this. It is preferable to entrust this responsibility to one of the existing regulatory agencies rather than creating a new one, which would only increase an already bloated and unwieldy government bureaucracy.

Perhaps the solution is to expand the competencies of the Consumer Protection Agency to include monitoring the performance of state monopolies. More importantly, will parliament get the message?

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