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7/27/2019 6 Privatization Deregulation CBA
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Transport Economics and ManagementPrivatization, deregulation and cost benefitanalysis
Eric Pels
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TEM2
This lecture
Privatization and deregulation
Cost benefit analysis
Learning objective: Be able to explain the reasons for
privatization and deregulation, and if these reasons arevalid in the transport sector. Be able to explain and
interpret the steps in cost benefit analysis.
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TEM3
Privatization and deregulation
Privatization Transfer of all or part of ownership of business
organizations from public to private sectors Deregulation
Loosening of government controls of an industry, enablingit to be increasingly directed by the free market
Political trend in last 2-3 decades
Neoliberal policy; Reagan and Thatcher administrations Laissez-fare approach: von Hayek; Chicago School of
Economics (Friedman)
Examples: energy, mail, rail, nodes (airports, ports),airlines etc.
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TEM4
Arguments in favor of
privatization/deregulation
Entrepreneurial spirit
Competition in capital markets
Elimination of political misuse
Erosion of crowding out Maximum to feasible investments in economy
Public
investments
Private investments
Maximum possible investments
Increased
governmentborrowingdiscouragesprivateborrowing(high interest)
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TEM5
Arguments in favor of
privatization/deregulation
Widening of shareholdings and economic interest Increase populations interest in economy
Political motivation: shareholders positive towardsadministration
Employee ownership
Fiscal improvement Public funds
Revenues Tackling of unionization
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TEM6
Arguments against
privatization/deregulation
Marginal cost pricing Public company more likely to set prices at marginal costs
Natural monopolies (next slide)
Safety concerns Regulation of British bus industry in 1930s due to
dangerous driving
Risk; accidents (external costs)
Control of externalities Redistribution if income and wealth
Subsidisation of services delivered to the poorer
Job protection
Share-ownership consolidation
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Methodologies of privatization
Complete transfer of firm from public to private
sector by selling of shares
E.g. infrastructure operators; natural monopolies
Competitive tendering of constituent parts of
market
E.g. train services, bus services
Franchised monopolies
Bid with consumer price receives the license (P=MC)
Highest bid (lowest subsidy) receives the right
Service quality
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Risk and failure
Political risk
Privatized company important to politicians Private firm can be less efficient if government will not
allow firm to fail
Does government commit to free market?
Policy risk: government fails to implement correct
policy Decision making: what do we want?
Funding
Regulation
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Example: FYRA
NS/KLM had highest (and
only) bid in
2001(148mln/year) Government workers
expected bid was too
high
Foreign competitors?
2004: AnsaldoBreda andAlstom propose bids to
deliver trains
AnsaldoBreda wins
Technical problems
TEM9 source: www.spits.nl
source: Vrij Nederland
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Cost-benefit analysis
source:
www.kennisbetuweroute.nl
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Project appraisal
Financial appraisal Evaluates project based on net gain
Economic appraisal/cost-benefit analysis Includes all costs and benefits to society
also external costs and benefits
Ex-ante: during decision making
In media res: during lifetime of project
Ex post: After decision is made and project is completed
Netherlands: OEI
(Overzicht Effecten Infrastructuur, Overview effects infrastructure)
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Cost-benefit analysis: methodology
Specify the options
Identify the impacts Predict total impacts over the lifetime of project
Monetise impacts
Discount the impacts to obtain present values
Conduct sensitivity analysis
Compare net present value of each project
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Specify the options
Alternatives (excluding regionalairports. Source: www.minvenw.nl
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Identify the impacts
Costs Flyvbjerg: power and rationality in decision making
Cantarelli et al. (2012) NL, 1980-2012: infrastructure costs on average 16.5% higher than planned (ranging
from -40% to 163%)
Psycological factors: enthousiasm
Political factors: high costs unacceptable
Benefits
Direct effects
Indirect effects
PM (hard to monetize) Political decision
7/27/2019 6 Privatization Deregulation CBA
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Identify the impacts
Direct effect infrastructure investment
Effect of a project accruing to the owner or operator ofthe infrastructure or user of the infrastructure, or an
external effect resulting from (the usage of) the
infrastructure
Indirect effects
Effects of infrastructure investment, not directly relatedto the project, but resulting from the direct effects
Often redistribution of direct effect
Owner, operator or user passes direct effect on to clients or
suppliers
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Identify the impacts: example
Direct effects airport investment
Users
Travel time and cost savings
Aviation side of airport activities
Airport operator, airlines, handlers
Non-aviation side of airport activities
Shops, restaurants, parking
Indirect effects Users pass direct effects on to customers or suppliers
E.g. lower prices for transport services
Changes in labour-, capital-, real estate markets
Can be negative: crowding-out
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Effects of project investments
Example
Input x used to produce y, sold at price r a units of x needed for y
Total need x=a*y, or y=x/a
Full competition
Average cost at minimum
Project investment
Input cheaper; ac decreases
E.g. runway or rail capacity, used by airlines or railroads
17
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Effects of project investments
18
Effect of input price change
x
p
x1x0
p0p1
Change in surplus:
0.5*(x0+x1)*(p0-p1)
(rule of half)
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Effects of project investments
Input x used to produce y, sold at price r
a units of x needed for y Total need x=a*y, or y=x/a
Cost savings: a*(p0-p1)
Assumption: full competition
Surplus change in y-market: 0.5*(y0+y1)*(r0-r1)
0.5*(x0/a+x1/a)* a*(p0-p1)
0.5*(x0+x1)*(p0-p1)
19
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Effects of project investments
20
Change in surplus in output market same as in
input market
y
r
y1y0
r0
r1
Change in surplus:
0.5*(y0+y1)*(r0-r1) =
0.5*(x0+x1)*(p0-p1)
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Effects of project investments
Effect of investment on economy measured by
change in surplus in input market Direct effects measure for indirect effects
Assumptions:
full competition
no substitution (a does not change when p changes)
21
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E.g. market power
Effects of investments
22x
p
x1x0
p0
p1
y
r
y1y0
r0r1
input (transport) market output (product) market
mr
mc1
mc0
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E.g. scale economies, market power
Effects of investments
23y
r
y0
r0
profits
mr
y
r
y1y0
r0r1
profits
mr
mc1
mc0
mc1
mc0
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CSx
CSy,y additional welfare effect:
CSy -CSx+y
difference between direct and indirect effect
Welfare effects
24
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TEM25
Identify the impacts
Direct effects vs. indirect effects
Price system is allocation method
Competitive economy: price equals marginal costs. No economies of scale
No external costs (unless reflected by equilibrium price)
No barriers to entry
No informational barriers
Market failure: direct effetcs indirect effects How important are indirect effects?
Difficult to measure: p.m.
Often double counting
Rule of thumb: 30% of direct effect.
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TEM26
Identify the impacts: double counting?
Direct effects vs. indirect effects
Ticket tax
Direct effects aviation sector
Catalytic demand effects (ICAO): off-airport expenditures directly
related to use of air travel (travel, tourism, freight business
activity)
Induced effects (ICAO): spending of income earned through
direct and catalytic effects, and tax spending.
Direct: 24%, catalytic: 29%, induced: 47%
Direct effect: -350 million, 70% (-245 million) for NL
Total effect (direct + indirect): -1458 million (-1020 million for NL)
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TEM27
Identify the impacts
Why are people looking for high indirect
effects?
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TEM28
Predict the total impacts over the life
time of the project
Infrastructure has economic life of many
decades Forecasting of effects
Lecture 1
Scenario analysis
Success of project depends critical factors
Economic development
Political development
Technological development
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TEM29
Monetize the impacts
Steps 2 and 3 list all effects in different units
E.g. Time savings/losses, accident risk,emissions etc.
Monetize effects
Non-marketed products:
Revealed preference
Stated preference
Abatement costs
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TEM30
Discount impacts to gain present values
Difficulty: social discount rate
0
0
1
1
n
t
t
t
n
t
t
t
CPV C
s
BPV B
s
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TEM31
Discount impacts to gain present values
t
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TEM32
Discount impacts to gain present values
Ministry of finance (NL, 1995): 4%
Germany 3%
France 6%
Denmark 7%
France 8%
EC 5% Current practice
Open to discussion
Why do people want a low discount rate?
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TEM33
Conduct sensitivity analysis
In all steps there is uncertainty
How do results vary with assumptions?
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TEM34
Compare net present value of each
alternative
Cost benefit analysis is a tool
Present values of net benefits PM items
Political decision
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35
Summary
Privatization/deregulation
Political process
Positive and negative effects
Cost-benefit analysis
Tool
Know what limitations are
Political decision