José A. Gómez-Ibáñez

Public Service, Private Gains: (De)regulating Infrastructure Monopolies
“[M]onopoly arises to some extent because technical considerations make it more efficient or economical to have a single enterprise rather than many … There is unfortunately no good solution for technical monopoly. There is only a choice among three evils: private unregulated monopoly, private monopoly regulated by the state, and government operation.”
- Milton Friedman

Commonly regarded as natural monopolies, infrastructure systems and service providers, such as electrical power networks, mass transit systems, telecommunications networks, and water services are characteristically vertically integrated, normally operate on a vast scale relative to the size of the market, and, given their market power, are often subject to some form of government regulation or supervision that seek to moderate abnormal profits while encouraging continuing investment in the sector. In Regulating Infrastructure, Gómez-Ibáñez assigns himself not only the task of tracing the history of government supervision of natural and statutory monopolies in selected countries but also the job of examining and fine-tuning strategies for the regulation of public utilities. Gómez-Ibáñez, a professor of public policy and urban planning at Harvard University, provides an analysis of infrastructure regulatory regimes – private contracts, concession contracts, and discretionary regulation – available to policymakers. Examining the literature on regulation and shedding light on the experience of various countries in deregulating certain industries, Gómez-Ibáñez seeks to explore the advantages as well as the attendant costs in taming utility and infrastructure monopolies.

The book highlights three themes in infrastructure contracting and regulation. The first is that market-oriented, contract-based responses to monopoly are, in certain respects, inherently superior to concessions and discretionary regulation, due to the direct participation of the consumer in contract design and the concomitant opportunity to incorporate tariffs and service offerings which are in line with the requirements of both the providing firm and the end-user. The next theme revolves around the degree of commitment to a stable set of rules by both the government and private infrastructure providers. Contracts should impose realistic obligations on both the government and the infrastructure provider: the government or a regulatory agency should honor its commitment to allow investors in infrastructure projects a reasonable rate of return and avoid yielding to popular pressure to reduce tariffs, while private infrastructure firms are expected to refrain from taking undue advantage of their monopoly power. The third theme is about the evolution of regulatory schemes – the certainty of change in technology and operating frameworks means that highly specific commitments in long-term infrastructure contracts can be negated by the speed of technological innovation and shifts in the socio-political landscape.

Regulation, even in the best of times, does not guarantee superior economic and redistributive outcomes. By way of response, Gómez-Ibáñez makes the case for market-based contractual mechanisms by studying the regulatory experience of different industries in various countries. In particular, the experience of the US railroad sector highlights the possibility of ‘turning back the clock’ in terms of regulatory control over private industry: the declining fortunes of railroads by the middle of the twentieth century due to the emergence of competing modes of transport, combined with an unsustainable cost structure that was partly attributable to a regulatory regime that stifled the industry’s modernization efforts and rate flexibility, led to calls to limit the powers of the Interstate Commerce Commission. In response to such an operating environment, rail operators gradually turned to private contracting with manufacturers and shippers. These more or less informal, unsanctioned arrangements were reminiscent of the private contracts between Standard Oil and the railroad companies during the latter part of the nineteenth century. The eventual abolition of the Interstate Commerce Commission in 1995, which was established in 1887 in response to popular clamor to regulate railroads, was arguably one of the high-water marks of the deregulation wave in the late twentieth century.

The book raises a number of questions that merit further research. One is how regulatory regimes should adapt in the face of rapidly evolving market conditions and political climates. Gómez-Ibáñez recognizes that, over the long term, political support for private ownership of infrastructure may be eroded due to the deficiency of measurably superior outcomes, or continuing disagreements among users, investors, and governments regarding regulated prices and fair returns. Another area calling for further inquiry is how private infrastructure arrangements can be made robust in the face of weak political institutions and economic crises. In the final chapter, the author, acknowledging that public interest in deregulation and privatization is diminishing due in part to certain high-profile debacles, offers strategies in order to strengthen the various market-based regulatory regimes covered in the book. Such proposals may even prove to be workable, as long as the distributive implications of private control of utility and infrastructure enterprises are properly taken into account, and as long as all parties involved believe that deregulation and privatization yield demonstrably superior economic and social outcomes.… (mehr)