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Re: privatisation of public sectors

Administrative Note:

Week's Agenda: Economy

At 10:46 AM 10/16/98 -0700, Prabhu wrote:

>     Your prescription was exactly what has been tried in the UK (including 
>     privatising railtrack and rolling stock).  The result, as I said in an 
>     earlier mail, has not been a success.  I have not analysed WHY it has 
>     not been a success.  Perhaps someone knows of a study regarding what 
>     mistakes have been (are being?) committed, so that if we do decide to 
>     go for privatising Indian Railways (IR) we can at least try to avoid 
>     the mistakes which have been identified.  However, as I said earlier, 
>     I have yet to see evidence of a national railway system working 
>     efffectively without subsidies.


As I said in the previous email, any privatized rail system can become
'successful without subsidies' if the tariff were high enough -- one of the
advantages of being a monopoly! That a privatized railway still needs
subsidies is not an indication that efficiency gains are not being made. It
may just mean that the govt has more than one goal: namely, reduce the
fiscal strain of a loss-making SOE, and keep tariffs to a politically
acceptable minimum. As such, maintaining subsidies to a privatized firm may
not be bad, as it satisfies both govt objectives partially. If we were to
insist only on  one govt objective - reducing the fiscal burden -, we can
just increase tariffs. In both cases, the private operator can make
substantial efficiency gains.

I am still trying to figure out what happened in the British Railways
privatization. (I believe that a LSE professor, Michael Bleesely
(spelling?), has written extensively on Britain's privatization efforts.)
Also, the lack of success in privatizion does not mean that we should not
try it. In fact, the weight of evidence, although still inconclusive, is in
favor of regulated, private firms (w.r.t. efficiency) over state-owned
firms. (I think I read this in the WBk's "Bureaucrats are still in
business", or another WBk publication; I can't remember.)

Plus, the recent wave toward privatization is still quite new. So, I am less
worried that privatization is not 100% perfect.

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