Privatization
Competition and Regulation

Privatization has played an important role in the economic policies pursued by a number of countries in recent years. Much of the debate concerning these policies has focused on the implications of privatization for competition and the regulatory process.

CEPR held a workshop on 6 January to discuss an agenda for research on this issue. Jurgen Muller (Deutsches Institut fur Wirtschaftsforschung, Berlin) presented the first paper of the workshop, entitled 'Competition as a Regulatory Tool for Telecom Networks'. MüIler argued that the momentum for change in telecommunications policies had come from several sources. The rapid convergence of technology in the communications and data processing industries had pushed firms already involved in data processing to enter telecommunications markets. Pressure for change also came from the emerging demand for new and specialized telecommunications services and from growing dissatisfaction with cross-subsidies. Most European Community (EC) countries had liberalized their markets for equipment situated in customers' premises. This had led to improvements in prices and product variety. There was, however, a need for continued. vigilance by regulators to maintain freedom of entry into this market, especially in view of the market power that the principal network operator might possess. Müller also advocated the adoption of EC-wide measures on standards and compatibility.

MüIler then discussed measures to promote competition in network services, such as the encouragement of Value-Added Network Services {VANS). He contrasted the more radical approach adopted in the United States, and to a lesser extent in the United Kingdom and Japan, with the more gradual liberalization elsewhere. In network services too there was a need for regulation to safeguard the competitive process. Anti-competitive tactics, such as price discrimination: could be discouraged by guaranteeing the purchaser's right to resell the network service.

Francis McGowan (Institute for Fiscal Studies) reported his work on 'Privatization and Competition in European Civil Aviation'. He compared the measures adopted by EC countries to privatize their airlines and to encourage competition among them. The United Kingdom was an example of a country in favour of both privatization and increased competition, with France in favour of neither and West Germany keener on privatization than on competition. McGowan discussed the effective exemption from competition policy that national airlines have enjoyed, and he criticized the limited extent of the deregulation of international routes recently proposed by the EC.

In 'Privatization and the Rise of the Regulatory Agency', Cento Veljanovski (University College, London, and CEPR) urged that economists and policymakers pay greater attention to the institutional structures being developed for the regulation of industries where privatization and liberalization are taking place. He took as an example the 'three-tier' institutional structure of regulation in the UK telecommunications industry, where the Department of Trade and Industry, the Monopolies and Mergers Commission and the Office of Telecommunications (Oftel) all had regulatory responsibilities. Such shared responsibility contrasted with the regimes recently devised for the regulation of financial services and cable communications in Britain. Veljanovski argued that in practice the implementation of regulatory policies depended very much on the information available to and incentives facing the regulatory agencies: competition between regulators might arise if their jurisdictions overlapped. One effect of privatization was to make regulation more visible and legalistic than. under public ownership, Veljanovski noted (Cento Veljanovski will discuss the commercial implications of the deregulation of the UK television broadcasting Industry at a Iunchtlme meeting on 11 May.

Michael Waterson (University of Newcastle) offered 'Some Thoughts on Regulation and Competition Issues under a Return to Social Ownership'. He argued that the recent experience of privatization in the United Kingdom would offer lessons about the appropriate mechanisms for controlling companies such as British Telecom and British Gas if they were renationalized. Waterson suggested the use of managerial incentive structures involving rewards related to performance, measured in terms of cost-efficiency rather than profit. Waterson discussed the role of regulatory mechanisms for public enterprises, as well as the possibilities for social ownership at the regional or municipal level.

Participants at the workshop considered directions for future research, emphasizing international perspectives on competition and regulation. They discussed work already under way as well as the problems involved in gathering suitable data. A number of broad themes and questions which merited further analysis were identified. To what extent is competition practicable and desirable in 'network' industries? What forms of regulation to safeguard competition are required in privatized industries? What are the relationships between regulatory bodies and the anti-trust authorities, and what role is played by EC competition law? What information is available to and what incentives are faced by regulatory agencies, and how do they affect the implementation of regulatory policy? How do the incentive properties of cost- and price-based regulation differ? Are international comparisons of the performance of regulated industries useful guides to policy formulation?

Miller (University of Warwick and CEPR) noted that if information and agency models were indeed important, then the basis of contemporary finance theory might be seriously flawed and not, perhaps, the most useful starting point for future analysis.

The second session of the afternoon centred on a paper presented by Paul Grout (Bristol University and CEPR), entitled Regulation and Self-Regulation In Security Markets'. He compared self- regulation to