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Institutional Transition And Privately Owned Public Utilities Zhang Shuguang Zhang Shuguang In the history of mankind, participation of individuals and communities in the production and supply of infrastructures and public services had been known very early. Education was provided by private individuals (village schools) and churches, medical service depended on traveling and residential physicians, both communication and water supply were also cared for by private individuals or the local community. In accordance with my recollection, before emancipation and in early emancipated days, fresh water wells were operated by private individuals in Xian. During modern times, as governments became more powerful and cities became more developed, there emerged public utilities specializing in infrastructure and public service provision, which became the monopolized sphere of public utility enterprises after the war, and there appeared the theories of natural monopolies and government regulation. The government became the chief provider of postal and electronic communication, power supply, mass transit, waterworks and sewerage, and other products and services. In a planned economy, while there remained private sector in competitive sphere, which had been eliminated and excluded completely from the public utility sphere. However, scientific and technological development, extension of social division of labor, and the change of organizational structure had weakened the degree and sphere of natural monopoly on the one hand, and created new competitive spheres on the other. For example, construction and maintenance of road network and provision of transportation services, construction of power network, transmission and production of electric power, construction and operation of communication networks and provision and linkage of ISP services could be treated separately, that those economic activities having been naturally monopolized formerly began to have competitive properties. It creates opportunities and conditions of admission for private enterprises. Meantime, in those countries where infrastructures and public services are supplied by publicly owned monopolized enterprises, low efficiency with bad service and high cost prevails as a rule. In order to fully exploit these opportunities and conditions, to allocate the public resources and capabilities effectively, many governments distinguish among financing, operation and provision of infrastructures and public services, competitive and monopolized sectors of public utilities, and programs of social insurance and social aids, allowing private firms to participate in the production and provision of public goods and services in general. Thus we have the trend of privately owned public utilities. For example, within the communication sector, private enterprises in both European- American and Asian countries have engaged in the competition for long distance call, honeycomb telephones, and internet value-adding services. In the electric power industry, many investors engaged in plant construction, increased power generation and supply. And public utilities like municipal gas supply, waterworks, and public communication open the door to private sector too. It must be pointed out that economic theories and their background of social philosophical changes had reflected changes in social economic structures and their operating style, they also provide for the explanation thereof. In general, economic theories and their philosophical ideas could be classified as state interventionism and economic liberalism. All economic theories and their practices have been shifting between these two schools. Nationalization and privatization of public utilities illustrated most vividly these changes and interwoven with them. China´s economic reform has had a history of twenty five years which could be generalized in one word: marketization or privatization. To loosen the grasp and cede some profits at the beginning of reform had nothing to do with the state sector, only to grow a non-state sector besides. It had been for the entire reform process that the private sector had entered into one by one sector formerly monopolized by state owned enterprises and grew continuously larger and larger. So the privatization of public utilities was one important aspect of marketization, and also the expression of its deepening. There were two very important occasions for the private sector to enter into public utilities. One was when shackles restraining productive forces were scattered by reform and liberalization, production activities were prosperous everywhere, and strong demands were raised on public utilities such as communication, electric power, waterworks, gas supply, and transportation, the original facilities operated by state owned monopolies cannot satisfy the rapidly increasing market demand. At the same time, the government could not finance so much new investments and constructions in a short run. So foreign capital and domestic private capital began to be involved in the incremental part of public utilities, from Lubuge Power Plant, San_Mao Railroad, to gas power generation, minibus passenger transit, and taxis in cities. In the meantime, the publicly owned utilities had not declined, they could even manage to develop and grow. Another occasion was that the original public utility facilities were obsolete with piping and network wanting repair, needing urgently reconstruction and regeneration. In particular, as reform was deepening and competition more acute, defects of state-owned enterprises were exposed: low efficiency, high cost, large deficits, and poor service. In particular, not only publicly owned utilities had no means to regenerate by their own efforts, they even became a heavy burden of local governments and public finance. In order to develop local economy, to lighten financial burden, and to improve the city functioning, there began the reform of the stock part of public utilities. It began as contracted or leased operation, then developed into complete privatization. The area for privatization expanded gradually, from public transit, express delivery of postal items, power and water supply, to airport and wharfs, passenger and cargo transport, information transmission, etc. There were many forms of privatization, from stock participation to acquisition, bot, etc. In fact, flow and stock are interwoven and interchangeable. The two aspects and two occasions of privatization could occur sequentially, one would be before the other, both operating independently. They could also occur simultaneously, operating together. One was within the other, and vice versa, propelling reciprocally. While the process of public utilities privatization was advancing, there emerged competition among government departments in the area of public utilities. The birth of Unicom and competition between it and Telecom, and the further breaking up of Telecom are horizontal competition among different state owned enterprises under the same government. There is also vertical competition between the central and local governments, the CDMA wireless phone is just one example. 3. The Unlimited Business Opportunities of Public Utility Privatization . There have been some achievements in the direction of public utility privatization. However, it is just a beginning. I have no data in this respect, and do not know who can supply the data. However, according to my observation and estimation, privately owned public utilities account for less than one tenth of the total, either in the case of number of enterprises or in terms of amounts of sales. Privatization of public utilities is now at its childhood. According to the traditional theory and idea, public utilities need huge investments and long gestation periods. They would usually make loss, and out of private stakeholders´ reach. Only governments can afford to start such enterprises. But the reality of privately owned public utilities does not agree with the just mentioned theory and idea, it contains unlimited business opportunities. In general, public operation does not aim at profits, also it would not compete with citizens for profits. On the other hand, private firms must earn profits. The proverb says: "no one gets up early without profit." Private capital never enters into no-profit areas. Under modern technological conditions, there are two kinds of enterprises having attractive prospects and substantial profits. One is the sector with high risk and handsome remuneration, such as the high and new technology industry in general., growth of Microsoft and rise of Cisco Systems in particular. In a few years they became leaders in the field with gross profit above 50% of the total. In the course of merging and reorganization the scale of enterprise has grown geometrically. The domestic enterprises, Hua Wei and Zhongxing Telecom are following their foreign counterparts. Another is those enterprises, earning moderate, average profits. They have broad markets, stable profits, remunerative in both prosperous and slump years, having nearly no risk. The stock market have many problems, with price fluctuation unpredictable. Price level of individual stock or block may move violently, but the block of public utilities has kept relatively stable, with minor fluctuations only, it shows itself as a good investment outlet. Moreover, as income level rises, urbanization process advances, demand for public utilities will expand, their operation scale will broaden, the quality of their service will improve further. So public utilities constitute a sector to be energetically exploited by private capital, also an area where entrepreneurs could fully display their abilities. Perhaps people would say, under such conditions, why the government and public enterprises would withdraw from the sector, why is there privatization? The reason is quite simple. The institution of government and public enterprises cannot adapt to the development and operation of public utilities, it restricts the initiative of the enterprise and employees striving for profit, and has no constraints to entail responsibility on them for the results of operation. The individual cannot earn more for a profit, and the government would grant subsidies for a loss. As an example, the waterworks operated by the Qionglai County Government, Sichuan Province, had obsolete equipments, backward technology, chaotic management, with much leakage and loopholes. It cannot satisfy the production and living needs of water, but the government had been increasing its subsidies. To evade the burdensome liability, the government accepted privatization finally. There came the Rui Yun Group. They introduced whole plant of advanced technological equipments from Europe, reconstructed the process with computerized control and clean production, a customer can tap water conveniently by inserting a card. The number of employees has reduced from more than 100 in the past to the present 12 only. Production shifted from daytime to night, to draw and process water at night and distribute it in daytime. The difference between peak and trough power rates only is sufficient to reduce the cost by a half. In accordance with the average water price in Chengdu Prefecture, it earns substantial profits. Though public utilities have stable profits and broad markets of which most are now under government control and operated by public companies. However, they are now under a half alive and half dead, or neither alive nor dead state. As reform deepens, the state owned sector practices a reorganization and retreat strategy. Privatization of public utilities becomes the general trend. 4. How The Government Pushes Forward Privatization Of Public Utilities And How To Direct Them As the foregoing paragraphs show, technical progress, more diversified division of labor, and organizational changes have brought market competition mechanism into the realm of public utilities. The degree and extent of natural monopolies have been weakening and dwindling greatly, but they have not disappeared completely. Even if public utilities are completely privatized, they are still different from the competitive sector. If the latter is in a perfect competitive market, the former is in imperfect competitive market. Hence government supervision is not only necessary for privately owned public utilities, it will be different from that for the competitive sector. The key problem facing us under the new situation is how the government pushes forward privatization of public utilities and how to direct them. The government supervision is not management by man, but that by law. Therefore to formulate and enforce effective legal codes could influence not only the process and results of market operation toward the public goal, it could also promote competition, encourage innovation, guard against the abuse of monopolized power, resulting in more efficient market mechanism. However, the formulation of legal codes must be in line with technical and organizational changes, and compatible with the government´s capability. According to the 1997 World Bank Report, there are two types of supervision on privately owned public utilities: the first type is adopted by those countries having strong organizational ability. They emphasized control of prices. The official duties of the independent legislator were thus demarcated and the government organization can also counteract any arbitrary behavior of the monopolist. It would encourage public utilities to operate efficiently and to engage in innovation on the one hand, and leave a substantial part of decision making to the legislator on the other. For instance, what the United States does is price regulation. The government agency proclaims a gross price level for the public utility, based on the inflation rate after deducting a coefficient. The United Kingdom adopted a set of elaborate check and balance. Any determination opposed by public utilities must be explained by the Monopoly and Merging Committee and the Secretary of State for Trade and Industry. The second type is adopted by governments with weak organizational ability. The private investors of public utilities plays the role as contractors. During the 1950´s of the last century, the communication sector in Jamaica was trusted to the operator by a legally enforceable contract with detailed articles and forty years term of validity. And it was guaranteed by an application of extrality. Because Privy Council of the United Kingdom is the court of last resort of Jamaica Judicial System. For guarantee purposes, some government agrees with private investors to a “take or pay" clause, which is enforceable legally. It could also be guaranteed by a third party (for example, the World Bank), to protect private investors or lenders from non-commercial risks, including confiscation and nationalization. Based on experiences and teachings of many countries, the World Bank Report warned us: don´t indiscreetly establish an organizational ability intensive institutional system in a country with scanty resources of such ability. It would be better to rely on market adjustment by normal rules as a supplementary instrument to other methods, or as a final instrument thereof. China is now under transition of economic institutions, equipped with a strong administrative control on the one hand and a weak rule of law on the other. Politically, the state has not yet established the intention of insisting on legal institutions promulgated by itself. Organizationally it hasn´t yet independent and impartial judicial system to enforce verdicts. Hence, under present conditions, it would be unrealistic, even inefficient, to rely completely on legal management. On the other hand, to make use of various types of promise management mechanisms may reap benefits larger than drawbacks. Meanwhile, there are uncertainties in the institutional transition such as the tenure of office and officials´ short term behaviors. The first thing for the investors and lenders participating in the privatization of public utilities to be anxious about is government reorganization and officials breaking their promises. It is also the greatest obstacle in the privatization of public utilities. In the present conditions, as the privatization of public utilities in China could not be managed and operated with normal rules, and must make use of various management -promising mechanisms, so how to make such mechanisms working effectively would be the important problem to be studied and discussed. In accordance with the available experiences, it would be worthwhile to note the following: 1) The private investors and lenders participating in and acquiring the property rights of public utilities, practicing private operation there- of, would preferably pass through an open competitive procedure. The government would declare an announcement of public utility privatization, listing qualifications of participants, and make related promises. Then there would be several private enterprises bidding for the tender, finally the tender would be opened and confirmed by a review committee, composed of specialists, scholars, public figures, government officials, and men from enterprises. The impartial organization will make impartial selection. 2) The government would sign a legally effective contract of public utility privatization with the private investor, expressly demarcating the operable rights and obligations of both parties in detail, including breach of contract, compensation for loss, and punishments. In particular, there must be a statement to the effect that reshuffle of governments and shift of officials do not influence validity of the contract. It is the successor´s responsibility to ensure the contract executed completely. Though a promise on paper, it is a constraint and guarantee nevertheless. 3) Within the present administrative system and bureaucracy of China, if the privatization of public utilities as a policy of lower echelon government has been confirmed and appreciated by the higher echelon of government, it would be a favorable and good condition. If the higher echelon of government or its financial department would play the third party to guazrantee the management promise, the privatization will proceed smoothly. 4) The supervision of public utility privatization by government consists of quantity and price regulation in addition to conventional supervision by law and regulations. For example, too many taxis cause traffic jam and pollution , similar problem could be found in other areas with different concrete situations. The common remedy is to auction off franchises to would-be operators, what is crucial is open, transparency, and no discrimination. Price regulation would be usually in the form of price ceiling. using average price as the price ceiling, while private enterprises could still make profits as a rule, because public enterprises usually have relatively higher costs. If price ceiling is adjusted for inflation rate, it would be more flexible and effective. |