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Re: privatisation of public sectors

Administrative Note:

Week's Agenda: Economy

At 10:23 AM 10/15/98 -0700, Prabhu wrote:

>My view is that the railways cannot be privatised successfully (I am aware
of a 
>few LOCAL examples in the world where city-railways have been run successfully 
>in commercial mode but most successful national rail systems are subsidised).  

It is easy enough to create a 'successful' railway. E.g., allow railways to
charge as much as they want (even monopolistic prices). In this case, there
will NOT be a need to create a subsidy. However, when talking about
'success' in a monopoly, the govt may have other objectives to fulfill
(e.g., prices below monopolistic levels).
I believe that even railways can be privatized successfully. Here is one
suggestion: Break up the railways into regional pieces (say into 15 pieces
across India). Next, award mgmt contracts (of, say, 15yrs duration) to the
private sector on the basis of the highest concession fee. Create a
concession contract that provides the right incentives to maximize
efficiency under the constraint of regulated prices act of competition
between the various regional concessionaires will provide yardsticks to
judge each other's performance. Etc... (I have yet to figure out if this is
the best policy for railways, though. E.g., allowing even private ownership
of the tracks and rolling stocks may even be more efficient.)

>However, there is no reason why the railways cannot have more market-oriented 
>principles applied, for example in incentivising the Board, managers, and even 

The WBk study that Professor Roy (?) mentioned earlier, "Bureaucrats Are
Still in Business", shows that state-owned firms that were not privatized,
but, instead, were given performance contracts, failed to improve (as
measured by total factor productivy), with even some even doing worse than
before. Namely, it seems that a big factor is that, in public firms, despite
agreements to the contrary, the govt cannot help but interfere.
As such, I would argue that, in the worst case, we should award management
contracts to the private sector in order to minimize govt interference.

- Pratap Raju

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