Water and asymmetric information
Why is it so hard to regulate private water companies effectively? This video presents some general conundrums of regulation.
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In Chile the asymmetry of information is a complain that appears sometimes from government officers working in the tariff calculation, they claim that companies inflate their costs taking advantage of their better technical teams, or at least better informed. However there are a good thing in the system to determine price: Government creates a fictitious company with standards of efficiency internationally comparable with some of the best and determines costs, investments and profit for the concessionary. The good thing is that this study is public at Internet, available for anyone to review and analyze and many people is interested to examine it with microscopy: posible competitors for next term, politicians and even particulars interested in the matter. This is a good way to provide transparency, the full info is in a big book called "cálculo del decreto tarifario" freely available at http://www.siss.gob.cl/577/w3-propertyvalue-3511.html
In the US, many (most?) public utilities are publicly held companies. To investors, they want to give the appearance of being profitable, state-of-the-art corporations. To public regulators, they want to give the appearance of needing price hikes and significant improvements in infrastructure. Doesn't this arrangement provide a sort of transparency by allowing anyone who is interested to compare information given to both sets of stakeholders? In other parts of the world, are contracts for the provision of public services more often given to privately held companies? If so, doesn't that exacerbate the asymmetric information problem?
What is the advantage of privatization if in the end we have a private company running a monopoly which suffers from exactly the same problems as a public corporation? Prices dictated by political decisions rather than market considerations, bad decisions causing big loses which end up being funded by the tax-payer, incentives to improve quality of service non-existent due to monopoly power, inflated director salaries being paid by the tax-payer, etc, etc... What is exactly the difference between such corrupted "private" enterprises and a 100% public corporation?
A: there's no difference between corrupt private and corrupt public. Private can do better with profit incentive and imported ideas; public can do better with long run customer service. Both need good oversight to avoid corruption. So watch the REGULATORS :)
Alex, you got some good points but there are real advantages, I lived under both systems and on your questions I can comment:
a) The monopoly remains the same: that is true, are natural monopoly, there makes no sense to run several systemas in parallel
b) Prices dictated by political decision, not true, at least in countries where the private system do it well, as in Chile, prices are calculated, with a polynomial based in an fictitious company with market results comparable to a group of some of the most efficients in the world. The calculation is made public and available for anyone scrutiny. If government privatize and then calculate arbitrarily prices (as it happened in Bolivia and Argentina at a certain degree) certainly makes no big difference.
c) There are strong incentives too improve, one is psychological (or sociological): being private companies are under strict public scrutiny, the concession must be renovated every certain years and the companies must work hard to ensure that customers are happy with quality of service, they are accountable, Government officers are NOT
Great exploration of an under-discussed point from Public Choice economics (people look out for themselves instead of those they are supposed to serve). Don't forget that the asymmetries extend to all bureaucracies, including the regulators from the government! I've tried to tackle these incentive/information issues here: http://ssrn.com/abstract=1929114
