PRIVATIZATION

The Effects of
Privatization &
Deregulation on the
Pricing and Quality of Services

 Introduction
To implement an effective globalization strategy, countries must restructure their economies  through a rationalization process,  which requires the effective  implementation of the privatization  and deregulation strategies. One  could say that Rationalization of  the economy is a precursor to the  Globalization efforts.  The rationale behind privatization   and deregulation, and the effect it has  on the pricing and quality of service  provisions has been an issue that  most governments have had to deal   with for the past 30 years. Positive  and negative aspects of deregulation,  the impact which market forces have  had on companies, the relationship  between suppliers and customers,  and the way in which ‘quality’ has  to be defined by both are challenges  that Iranian corporate executives  have to face with going forward. 

Price Dynamics in Centralized and Decentralized Economies
It is necessary to consider the nature   of the free market and the relevance  of the price mechanism to supply  and demand. If an economy is  centralized, then policies dictate what  suppliers produce and there is often  control over consumer behavior. In  the decentralized or a market based  economy, however, it is the price  mechanism that is responsible for  fluctuations in economic activity.  High prices will mediate against  the consumption of those resources  that are most scarce, whereas lower  prices will encourage consumers to  purchase more of those resources   that are more freely available. The  price mechanism is an effective way  of ensuring that supply and demand  remains related to one another, but it  is also the case that it can result in an  unequal allocation of resources.  If supply and demand is dictated by  price, then the system will tend to  favor the most affluent customers  who are then able to dictate the  level of supply and demand. On  the other hand, in a social structure   where income is not as unequally  distributed, then the fluctuations of  supply and demand ensure that the  most productive suppliers are the  ones who continue to produce, and  resources are allocated where there  is the highest level of demand. One  of the essential foundations of a free   market economy is the existence  of competition between different  suppliers and manufacturers. This  is the basic way in which the free  market differs from a state-regulated  economy. In the latter, since the  government controls what is  produced and how it is distributed,  the consumer has very little choice  regarding options to purchase and  the state is able to set quantities and  prices to suit its own requirements,  rather than according to the needs   and wishes of the customer.  In a free market, however, the onus  is on different manufacturers to  produce goods that are of high quality  and competitively priced, and their  success or failure is dependent on  the way that the customer exercises  choice. In theory, this should ensure  that the customer receives the  maximum value for money, whether  this means buying the cheapest  product available (where quality is  less important than an economical  price) or buying a more expensive  but more durable item in cases  where good quality is essential. Even  though it might appear that under this  system, many manufacturers will be  forced out of the market because  they are not as competitive as others,  this is not necessarily the case, since  not all customers will have exactly  the same requirements. In a free  market, there ought to be no need for  government policy to intervene in  commerce, since the economy will  regulate itself according to supply  and demand.  As Suranovic (2004) points out, in a  free market or decentralized economy  where there are some examples of  domestic monopolies, correcting  the market imperfection is generally  accomplished through some form  of industry regulation. In the US,  for instance, where electric power  is purchased from a single company   in each region, the government  dictates price ceilings so that the  individual utilities companies cannot  set exorbitant prices. Their pricing  levels are forced to remain close to  the marginal costs of production.  In some industries this is relatively  simple. As Suranovic (2004) states,   with utilities it is often difficult to  ssess accurately the marginal costs  of production and therefore the  pricing regulations tend to be rather  complex.  We also have to take into account that  the provision of utilities is closely  related to social welfare: light, heat,  and clean water, for example, are  basic human requirements rather  than optional luxuries. This means  that pricing and service provision  in relation to utilities is, again, more  complex than would be the case for  other types of goods and services.  As Price (2004) points out, this  complexity was clearly illustrated  when power utilities in the UK were  privatized. Customer expectations  and concern with quality issues  were brought to the fore in the  course of the privatization process,  and consequently those responsible for regulation became increasingly  concerned with setting standards  related to service delivery. For the  most part, these were involved with  regulated monopoly provision, such   as the transmission and  distribution  of power. Waddams Price et al  (2002) found that direct economic  factors were not the only drivers,   for either regulators or customers.  Regulators found that it was difficult  to balance the customer’s desire for  better quality with their willingness  to accept higher prices. 

Motives for Privatization 

Privatization policies (selling state owned  firms to the private sector)  have grown from their relatively  modest roots in Mrs. Thatcher’s  Britain during the 1980s to be a world scale  phenomenon. As Valauskas (1998) points out, the motives  for privatization are not always  obvious. Some have argued that it is  essential for ideological reasons, in  that the public will invariably profit  from having a wider choice rather  than being confined to government  monopolies. Similarly, one could  say that from an economic point of  view, it will always be the case that  public services are less efficient than  those that are supplied by private  businesses in a competitive market  environment. In addition, privatized  industries tend to reduce the burden  of allocating limited resources that  governments invariably suffer when  allocating support and subsidies.  On the other hand, it is not always  the case that deregulation and   privatization is regarded as a  complete success: Cubbin and  Currie (2002), for instance, state  that although Britain gained an  “international reputation for  innovative approaches to managing  the provision of utilities” in the latter  part of the twentieth century, the  “sparkle has come off this reputation”   (Cubbin and Currie, 2002). They  point to regulatory problems with  Railtrack, NATS, and the London  Underground, and note that price  cap regulation, which is central to  the UK model of regulation, may  not be the most appropriate option  after all. They also note that whilst  in the early days of privatization,  there was a broad-brush regulatory  strategy, there is now a tendency  towards regulatory “creep” and  increased micro-management.
 

Privatization in the UK vs. the US
As Eliot (2001) notes, in reference to  deregulation in the UK, from 1987  onwards it was hard to envisage any  industries or utilities being left in  the public sector at all. Steel, water,  electricity, what was left of the  mining industry, were all privatized,  along with what Eliot refers to as the  “massively flawed blueprint for the  privatization of the railways” (Eliot,  2001). However, Eliot also suggests  that increasing privatization and  deregulation was not necessarily  a deliberate strategy on the part of  the UK government at the time.    He contends that the ‘rollback’ of  the state was something developed  more by luck than judgment, as the  Conservatives  looked for a way to  counter unemployment, industrial  strife and social discontent. Eliot  (2001) asserts that it was the idea  of popular capitalism, that owning  shares would no longer be confined  solely to the affluent, which made  the greatest contribution to the  demise of the state, and cites the  privatization of British Telecom and  British Gas as salient examples.  If we compare the privatization  structure in the UK with that in the  US, we can see some significant  differences. As noted by Kanhouwa  (1998) there were over 3,000  electric utilities in the United  States, and the industry is currently  changing its storage and distribution   network from a vertically integrated  monopoly to a “functionally  unbundled” competitive market.  There are a number of factors which  have influenced these changes, in  particular the technological advances  which have been made and the  need to address both inefficiencies   in the industry as a whole and the  variations in pricing structures  between different regions.  Both wholesale and retail pricing  structures have changed since the  1990s, and there has been an increase  in independent system operators, as  well as other issues that have had  an impact on consumer choice.  Fretwell (2002) comments that the  system of electricity supply is based  on  traditional utilities that have  monopolistic franchises; these are  based regionally, and supply prices are  controlled by government agencies.  Customers are classed according to  demand levels and categorized as  residential, commercial, or industrial  users.  raditional utilities can be  categorized according to ownership;  they may be investor owned, public  owned, cooperative or federal.  Investor owned utilities, comprise  75% of the total generating capacity;  profits are distributed to stockholders  or reinvested. There is, therefore,  considerable opportunity for a  competitive market to develop. 

Successes and Failures of  Privatization Strategies 

Have privatization strategies been  successful, in terms of improving  economy, efficiency, and the quality  of goods and services? If we look  in more detail at some examples,  we can evaluate the kind of lessons  that might be learned from both the  successes and failures of privatized  utilities, and how this might be  usefully incorporated into presentday  management strategies. If we  consider the deregulation of rail  transport in Britain, for example,  we can see a number of flaws in the  way that the transition was made,  some of which have not, even now,  been resolved in a way that offers  greater customer satisfaction or  value for money. As McDonald   (2002) points out, in its early stages Railtrack offered viable returns to its  investors; however, maintaining and  upgrading antiquated  and run-down  rolling stock proved a problem, as  did controversy over safety issues.  The rail network was split into too  many different companies, and  that it was impossible to run the  railways as a cohesive whole. There  was too much division between  the companies that actually ran the  train services and those who were   responsible for maintaining the  tracks.  The ‘ripping apart’ of the network  that had taken place in the course of  privatization had resulted in a system  that no longer prioritised investment  or safety, but was designed solely  to maximize profits. The company  acknowledged that part of the  problem was due to the lack of  investment in the rail network prior  to privatization, but also blamed the  fragmentation that was inflicted on  the railways as different  companies  took over different sections. Here,  we can see not only a negative side of  privatization itself, in the sense that  safety is  marginalized for the sake of  profit, but also an illustration of the  difficulties faced by regulators, who  are forced to deal with issues ‘after  the fact’ – in this instance, after  serious accidents have occurred.  If we compare the structure of rail  transport with that of the  postal service, however, we see a rather  different situation. Here, we have   both a government-owned service,  and a number of private competitors  giving rise to a two-tier system of  service provision. The existence of  these private mail services means  that there are substitutes available  and hence competition will exist.  In addition, we have to take into  account that the more efficient the  substitutes that appear, the greater  the buyer options will be.  Increasingly, the public are becoming  dissatisfied by inefficient, expensive  service and are turning towards  private companies who offer greater  flexibility and competitive rates.  Unlike the rail service, which  maintained its monopoly right up     to privatization, the Post Office is orced to compete within a twotier  system. Here, privatization and  deregulation do not necessarily  mean that goods and services have  been significantly improved, or that  the threat of monopolies has been  removed completely. Even within  a competitive market, a significant   level of monopolistic competition  (such as natural monopolies) can  still exist.  For a privatization strategy to  be implemented effectively,  a government must employ a  systematic approach to evaluating  whether the private sector provision  of services is the alternative of choice  in addressing specific  identified  needs. The decision to privatize  programs or services should be  based on a thorough review of the   experience of other government  privatization successes and failures,  as well as on a thorough cost and  benefit analysis. 

Reconciling Customer Satisfaction  and Demand for Quality
There are a number of ways in   which a new company can avoid the  mistakes of the past, and generate a  high quality service which will attract  and maintain its customer base.  In a two-tier system that includes  state provision, the independent  companies have much greater   leeway, in terms of customizing  their service provision according  to customer needs, than the state  institution. We can see this in the  problems that the US Post Office  has in changing rapidly enough to  remain competitive with the Federal  Express and the DHL. Another  salient example would be British  Telecom, which was obliged to  radically alter its corporate structure  in order to keep pace with the threat  of other telecom providers such as  Orange, Vodafone and O2.  If a company is part of a now  ‘fragmented’ network, as was the  case with British Rail, then it is  necessary to keep in mind that  customers will demand a cohesive  overall structure in which quality of  service is standardized; if individual  companies focus on maximizing  profit at the expense of other factors  such as safety and quality service,  negative public response may lead  to increased regulation or even the  notion of failed  privatization which  will be detrimental to the company.  Utility companies also need to be  aware that sometimes a drop in  quality of service is unavoidable,  and find ways of dealing with this in  a manner acceptable to customers.   In the US, for example, when  demand for electricity exceeds  supply, there are “brown outs” in  which the supply is reduced: motors  run more slowly, lights dim, and  people are requested to conserve  energy wherever possible. This is   not seen as poor quality service,  but rather an acceptable strategy to  maintain distribution as effectively  as possible. The aim of the company,  then, may not be to provide perfect  service at all times, since this  may not even be possible. Rather,  customers will be attracted to the   company which offers the most  efficient service which is practical  and feasible, at the most reasonable  cost. In an area where power cuts  are frequent and unavoidable, for  instance, the company that has the  most efficient strategies for restoring  power quickly is likely to have the   competitive edge on one with lower prices, but a reputation for being  ‘slow off the mark’ when dealing  with outages. Similarly, a transport  company that offers cheap travel  but has a demonstrably poor safety  record is less likely to be successful  than the one that generates sufficient  income from ticket sales to maintain  its stock and track in good condition,  and develop an effective health and  safety structure.  Conclusion   Iranian economy is going through  major restructuring changes. The  1404 Economic Vision of the country  in conjunction with the massive  upcoming privatization programs,  first require major rationalization,  deregulation and privatization  strategies to be implemented in the  country. Recent proposed Anti-  Trust and Privatization Laws and  the deregulation procedures are  being reviewed and passed by the  parliament. Special attention to the  proper designs and implementation  of these laws and  procedures are crucial for the rationalization of  the economy and the preparation to  join the WTO and globalization of  the economy. Maximizing profits  is clearly a central feature of any   management strategy in the country,  but it should be kept in mind that  as an Iranian executive entering the  new millennium and based on the  industry and regulatory structure  that a company operates,  customer’s  satisfaction and perception of what  constitutes ‘quality’ is going to be  highly significant for developing  a superior competitive edge and  optimizing stakeholder interests in  this globalization effort.