Know how to deregulate an Industry, privatize state firm

“The Evolving Bargain”
By Willis Emmons
Harvard Business School Press, 2002


There is public ambivalence about industry deregulation and privatization. On the positive side, people welcome that they can gas up in many more gas stations sporting names beyond Petron, Caltex and Shell. They have a choice among Globe, Smart, PLDT, Bayantel, Islacom, Digitel and Eastern Telecoms for mobile and landline communications.

However, they are disappointed that water rates are rising, even adter privatizing the Metropolitan Waterworks and Sewerage System – giving birth to Manila Water of Ayala and Maynilad of the Lopez Group. Of course, they fail to note that water supply has greatly improved in many areas. Labor and transport sectors complain that prices of petroleum products keep rising, inspite of deregulation. But, they gloss over the fact that production cutbacks by oil producers worldwide push these prices up.

Policy makers cannot make up their minds about the wisdom of privatizing stateowned National Power Corporation. Is it safe to unbundled such a monolith into small privately owned power companies? Consumers want to know: Will it result in lower power rates and stable supply of electricity? While the debate rages on the purchased power adjustment (PPA), the fate of privatizing Napocor hangs.

The issue and concerns regarding deregulation and privatization have been confined to so called experts – or newly converted specialists after a month of training. The rest of us are expected to take their word for it, because we don’t know any better.

Take heart. There is a book to make you literate (at least) about these buzz words – “The Evolving Bargain.” Sub-titled “Strategic Implications of Deregulation and Privatization,” the author has decided, first, to set you on a higher mood as he takes you on a world tour where governments are deregulating industries and state firms are handed over to private hands.

A witty quote on privatization from a cartoon in the New Yorker does the job: “In a move secure to attract the attention of regulators, the private sector made a bid to acquire the public sector!”

This was prefaced by the author’s observation that “everything heretofore state-owned or regulated us now for sale – from postal systems (the Netherlands) to social security systems (Chile) to stock exchanges (the United States),"

Like the scholar that he is, Emmons made a distinction between two terms that sometimes are lumped together. “Deregulation,” he points out, “refers to an increasing reliance on markets, not governments, to guide economic activity…Privatization refers to an increasing reliance on private firms, not government enterprises, for the provision of goods and services.”

Think of the dynamism that took over the telecommunications industry after it was deregulated, and these points will aptly describe “easing or eliminating” of government restrictions in three major areas: a firms freedom of entry into a market, its freedom of action within a market, and its profitability (maximum or minimum) within a market.

But, why the disillusionment on what is supposed to be a shot in the arm for economy? The book addresses this with three “paradoxes”. In the U.S., the Federal Communications Commission (FCC) requires rising budgets, expanding manpower and increasing rules. That must also be the case for the Philippines’ telecommunications sector, with the National Telecommunications Commission becoming more active than in the past when PLDT rules the roost.

The second paradox states that free markets in a deregulated environment are actually possible government requires “mandatory access” to critical infrastructure. This would happen when Napocor’s transmission grid, serving as a power superhighway, is required to open itself to independent power producers. This was also the case of PLDT when it was required to share its gateway to the new entrants.

The third paradox is that deregulation does not necessarily mean greated competition. The author cites the case of the U.S. airline industry, deregulated in the seventies. In the nineties, the industry was still concentrated in the hands of a small number of players.” Observers of the Philippine economy say that this is also true for the oil industry still controlled by the “Big Three,” inspite of the entry of new players.

The book is a slow read, not because it uses convoluted language, but because the subject itself requires time for analysis and the instinctive impulse to relate successful and failed efforts in various countries to our own national experience. You come away understanding what has been happening to our own liberalization efforts, noting uncanny similarities in other economies.

Whether you are a policy maker, an industry observer, a leader of an employers’ group or a labor leader – you will find this book giving you an informed perspective of a movement in economies that seems inexorable. In short, we might as well be familiar with the “wave of the future.” We might as well swim, not sink.