Regulation and public ownership in local

public services

Pippo Ranci

Florence School of Regulation, European Univ Institute, Florence

Università Cattolica, Milano

Ranci 2021 Turin School 1

Regulation and public ownership in local public services

1. Regulation of Markets
2. Services and Public Services
3. Competition and its limits
4. Firm Ownership
5. Conditions for good Regulation
6. Local Regulation in a globalised World

Ranci 2021 Turin School 2

Regulation and public ownership in local public services

1. Regulation of Markets
2. Services and Public Services
3. Competition and its limits
4. Firm Ownership
5. Conditions for good Regulation
6. Local Regulation in a globalised World

Ranci 2021 Turin School 3

 The notion of Regulation

• «regulation»: techniques to keep a machine functioning

• Extension: what is needed to keep a system functioning
(example: metering, standards, codes, technical
regulation, traffic code)
• The idea applies to any social organisation: make it
work to the benefit of the people by setting appropriate
rules
• It also applies to any economic organisation: Firms and
Markets are the basic components of a modern economy
• Freedom requires rules

Ranci 2021 Turin School 4

 Regulation of Markets

The behaviour of many independent agents should lead

to a common advantage, based on
• Competition
• to reach efficient solutions,
• to promote innovation,
• to select the fittest
• Regulation
• When competition is not feasible, provide a substitute
• In any case, assure that competition is fair

Ranci 2021 Turin School 5

 Regulation of Markets and Economic Policy

• Basic decisions belong in the area of government

policies, setting the goals (where to go)
• Still, many choices are required on how to get there
There is a need of:
• technical competence
• lengthy consultation of stakeholders
• continuity and consistency over time
• It is useful to have a specialised entity
• «Independent authorities» are a component in a well-
organised set of institutions
Ranci 2021 Turin School 6
Regulation and public ownership in local public services

1. Regulation of Markets
2. Services and Public Services
3. Competition and its limits
4. Firm Ownership
5. Conditions for good Regulation
6. Local Regulation in a globalised World

Ranci 2021 Turin School 7

 Public Services
Traditional definition: public services are all services
provided by a public entity
is useless: it does not explain why

Services of general interest

• Services which:
• are necessary or very useful to life: should be
available to all, with adequate quality levels
• would not be provided by private, profit oriented,
entities under normal market conditions

Ranci 2021 Turin School 8

 Cases of no good service
under «normal» market conditions

Services that may not be priced («public goods»)

• clean air, clean streets, urban green
• prevention in health care
Conditions of «natural monopoly»:
• no more than one rail network
Infrastructures providing benefits beyond direct use
• airports, rail and road networks, communication networks)
Services will be provided, but not to all
• due to inequalities in income and wealth

➢ Public responsibility is necessary

Direct provision by public entities is not necessary
Ranci 2021 Turin School 9
 Recent trends in services of general interest

• increasing demand (health, education, utilities)

• increasing complexity
• services are increasingly provided by private companies
under public responsibility
• for this, there are two ways
• regulated competition, wherever possible
• In case of “natural monopolies”: regulated
exclusive concession

Ranci 2021 Turin School 10

Regulation and public ownership in local public services

1. Regulation of Markets
2. Services and Public Services
3. Competition and its limits
4. Firm Ownership
5. Conditions for good Regulation
6. Local Regulation in a globalised World

Ranci 2021 Turin School 11

 Where a competitive market is possible:
competition policy

Contrast monopoly
• open and large markets
• competition among suppliers enforced by an Antitrust
authority
• set rules and monitor compliance: a Regulatory Authority

Legal obligations, limitations, subsidies

• to correct for externalities: taxes, subsidies
• to correct for inequalities: obligations to serve, differentiated
tariffs
• to assure universal service: a default provider

Ranci 2021 Turin School 12

 Tender the service?

• Competition “for the market” (tender out a monopolistic

service)
• a preliminary move: public procurement (contracting out) for
public goods or intermediate services
• The process of tendering must be fair
• The nationalistic – localistic bias: discriminatory
attitude towards competing companies
• Duration of the concession (incentives to invest)
• Levels of employment (the “social” clause)
• Quality levels (measurement of quality)

Ranci 2021 Turin School 13

 Where a competitive market is not possible:
a regulated monopoly

• Sometimes a state-owned company is better, sometimes

it is not
• A state-owned monopolist does not escape the
monopoly’s weaknesses:
• no contest, no incentive to efficiency, no choice for consumers,
no room for entrepreneurship
• moreover: political interference, often a burden on public finance
• Size of company limited by political boundaries

Ranci 2021 Turin School 14

 Network services are special

In presence of a network, competition may be impossible

or uneconomic: a classic case of “natural” monopoly

• Traditional consequence: a legal monopoly and a

concession of the whole service to a public-owned or to
a private-owned company

• This way the whole service is bundled (tracks and

trains, grid and electricity, pipeline and gas) Brand names

Ranci 2021 Turin School 15

 A solution for network services: unbundling

Network under a regulated monopoly

A competitive market for the services
Competitors must access the network under fair, non
discriminatory conditions

Steps:
• Unbundling (accounting, legal, ownership)
• Contents of network regulation: tariffs, rules for access
• A role for both industry regulator a competition authority
Problems:
• Interest links between network company and on service company
• Brand names

Ranci 2021 Turin School 16

Regulation and public ownership in local public services

1. Regulation of Markets
2. Services and Public Services
3. Competition and its limits
4. Firm Ownership
5. Conditions for good Regulation
6. Local Regulation in a globalised World

Ranci 2021 Turin School 17

 Public ownership

Historically, public ownership has been advocated on the

basis of:
• lack of a private supply
• essential goods that will not be provided otherwise (water
systems)
• missing private initiative as an engine for development (the “infant
industry” theory, basic industries)
• fear of private interests
• network services: railways, highways, electricity
• low confidence in competition, regulation
• keep essential services or powerful companies in national
or local hands

Ranci 2021 Turin School 18

 Today’s choice: public or private ownership?

• An ideological debate
• “public is always better”:
• the market is simply bad, an engine for inequality
• “private is always better”:
• the public sector is inefficient and corrupt

• A sound choice is pragmatic: which solution delivers better

results for the community?

• State aid runs against international agreements (and EU

law)

Ranci 2021 Turin School 19

 The basic weaknesses of public ownership

• A public enterprise is usually shielded from competition

and may control its controller
• It has conflicting goals: maximise profits and implement
political directives. How can managers be evaluated?
• A burden on public finance from losses and from
investment may lead to a vicious circle: lacking funds –
bad service – low tariffs
State-owned companies develop their own company interest.
Regulation can tip the balance in favour of the general interest

Ranci 2021 Turin School 20

 The basic weaknesses of private supply

• Competition may be insufficient to limit market power

• high prices - low quality - slow innovation

• A private company may focus on the profitable

segments of the market (cream skimming)
• A profit-oriented company may postpone innovation
until existing investment has been fully depreciated
Private ownership of service companies requires strong
regulation in defence of the public interest

Ranci 2021 Turin School 21

 Privatisation

• Privatisation may be required now

• even if state-owned companies have been useful in the past

• State-owned companies sold to whom?

• Partial privatisation (sale of minority shareholdings)

• unstable governance? minorities impose transparency

• When regulation is introduced, its legal frame may be

unduly influenced by regulated companies
• set up a regulator before or after privatisation?

Ranci 2021 Turin School 22

Regulation and public ownership in local public services

1. Regulation of Markets
2. Services and Public Services
3. Competition and its limits
4. Firm Ownership
5. Conditions for good Regulation
6. Local Regulation in a globalised World

Ranci 2021 Turin School 23

 Origin: the rise of regulation
• the US tradition of regulation
– Public Utilities Commissions since early 20th century

• in Europe
- public (or semi-public) ownership made regulation seem
unnecessary

• a revolution started around mid-1980s

– deregulation, opening of markets, privatisation
– objectives: efficiency through competition, shrinking and re-
orientation of State functions
– an independent authority has been seen as necessary
– rise of regulatory authorities 1990-2005

Ranci 2021 Turin School 24

 The task of a Regulator

• set tariffs for monopolistic services

• promote competition where possible
– access to networks
• set technical standards for safety, interoperability
• promote development of infrastructures using
obligations and incentives
• protect weak consumers
• advise Government

Ranci 2021 Turin School 25

 A good Regulator should be knowledgeable

• Managed by an expert or a board of experts

• Recruit personnel on the basis of competence
• Know the companies: accounting, investment strategies
• Know the markets: contracts, timing
• Know the industry: technology, optimal size
• Consult the stakeholders before taking decisions,
• adopting open procedures
• publishing “documents for consultation”

Ranci 2021 Turin School 26

 A good Regulator: independent and accountable

• Not subject to pressure from regulated companies

• No conflicts of interest

• At an arm’s length from Government

• Non-political mandate
• Clear definition of tasks
• Government shoould appreciate “the advantage of tying one’s
hands”

• Independent regulation is more stable

• A condition favourable to foreign investment (the World Bank)

• Decisions subject to judicial review

Ranci 2021 Turin School 27

Regulation and public ownership in local public services

1. Regulation of Markets
2. Services and Public Services
3. Competition and its limits
4. Firm Ownership
5. Conditions for good Regulation
6. Local Regulation in a globalised World

Ranci 2021 Turin School 28

 Many institutions in charge of local regulation

• The local area is often too small for setting up a local

regulatory authority
• The local administration may be weak in contracting out
the service, in designing and managing a tender
• Difficult cooperation in the Triangle: national
government - local administration - national regulator
(plus national antitrust authority)
• A special case: cooperative enterprises running local
services

Ranci 2021 Turin School 29

 Are uniformity or coordination necessary?

• The extreme cases:

• high uniformity needed in financial markets
• low uniformity needed in local services

• Instruments for coordination

– top-down: treaties, legislation, institutions
– bottom-up: cooperation, information, best practices

• Problem: the “regulatory gap” between:

• multinational issues, companies
• national (local) regulation

Ranci 2021 Turin School 30

 Dilemma

One national «independent authority» in each country?

➢ regulatory gap
• Different standards?
• Faciing international issues (water, natural/nuclear disasters, Arctic
& Anctartic regions)
• Facing global issues (climate change & loss of biodiversity, space
flights)

One global «independent authority» for all countries?

➢ political consensus is necessary

• Technical agencies exist: (e.g.: ICANN for internet)

• How long are they politically acceptable?

Ranci 2021 Turin School 31

 Hopefully solutions will continue to be found

A culture of regulation will help

• Markets may work well if properly regulated

• Complex technical issues require skilled regulation
• Political decisions on where to go, technical
implementation on how to get there
• Continuous dialogue between regulators, firms,
consumers

Ranci 2021 Turin School 32

bibliography
• Baldwin R., Cave M. and M. Lodge, Understanding Regulation.
Theory, Strategy, and Practice (Second Edition), Oxford University
Press, 2013
• Baldwin R., Cave M. and M. Lodge (editors), The Oxford Handbook
of Regulation, Oxford University Press, 2012
• Crew M. and D.Parker, International Handbook on Economic
Regulation, E.Elgar, 2006 (paperback 2008)

Ranci 2021 Turin School 33