Policy Economist: The future is in privatization of natural monopolies

Doha, Qatar (March 7, 2012): One of Northwestern University’s leading professors, Dr. Ronald R. Braeutigam, weighed in on a key economic policy issue in a visit to the Qatar campus on Monday evening. In an address to students and faculty, he suggested that “privatization is the way forward for many types of natural monopolies.”

“It’s starting to happen here in Qatar and the region,” said Dr. Braeutigam, who is Kapnick professor of business institutions at Northwestern University’s Department of Economics in Evanston, Illinois.  Many infrastructural industries, such as electricity and natural gas delivery, tend to be natural monopolies, noted Dr. Braeutigam.

Dr. Braeutigam’s comments were delivered during a lecture on “Economic Justification: When Governments Intervene in Industries that are Natural Monopolies” held as part of an NU-Q lecture and discussion series titled, “The Evanston Experience: Great Teachers from Northwestern University.”

 “The Evanston Experience program was created to bring the best of Northwestern University to the Doha campus,” said Dr. Everette E. Dennis, dean and CEO of Northwestern University in Qatar. “Dr. Breautigam is exactly that – an author, a policy expert, an award-winning teacher, and a leading economist.” Dr. Dennis continued, “As profound economic shifts continue in the region, understanding the interplay of governance and the economy has never been more important for leaders in the media field.”

Dr. Braeutigam made the case that government ownership or heavy regulation of a natural monopoly may not be necessary to prevent high monopoly prices.  There is no need for government intervention in a monopoly if it is indeed possible to auction off a franchise, if the market is contestable with small “sunk cost,” or if there is extensive “intermodal competition,” argued Dr. Breautigam.

For example, transportation as an infrastructural industry is “intermodal” when railroad competes directly with other alternate modes of transportation that could range from truck traffic to barge traffic on similar routes.

“If profits of a natural monopoly cannot be controlled through auction, contestability or intermodal competition, it may be possible to introduce regulatory mechanisms that induce a firm to operate efficiently,” noted Dr. Braeutigam.

“This can be done through incentive regulation and benchmark price caps,” he said.

Heavy-handed government intervention is rarely needed, according to Dr. Braeutigam, as experience shows for electricity and pipeline industries or postal service.  In the latter case, competition from newer communication services such as Twitter, Facebook and email create competitive pressure on the postal service prices without a need for government intervention.

Policymakers, concluded Dr. Braeutigam, should reconsider the need for government ownership of natural monopolies, and move instead towards privatization coupled with light government intervention where necessary.  He foresees a growing trend towards privatization in the Gulf and Middle East region, particularly in the wake of the Arab Spring.

Qatar has taken steps towards privatization of certain natural monopolies, having converted the state-owned Qatar Telecommunications Company into a public shareholding company in 1998 and transferring assets owned by the Ministry of Electricity and Water to the Qatar General Electricity and Water Corporation, a body that is 57% controlled by local investors, in 2000.  More recently, the General Customs and Ports Authority announced the planned privatization of the operations of the Doha Port and a new multi-billion dollar port scheduled to open by 2014-2015.

In addition to serving as a research economist in The White House Office of Telecommunications Policy and an economic consultant to World Bank, Dr. Breautigam has been appointed to the editorial boards of several leading journals in economics, and, from 1997-99, he served as President of the European Association for Research in Industrial Economics.

While at NU-Q, Dr. Braeutigam also met with members of the faculty and students as part of the “Evanston Experience” lecture and discussion series.  Northwestern University in Qatar initiated the series to enable undergraduates at the Qatar campus to learn directly from preeminent Northwestern faculty visiting from the home campus in Evanston, Illinois.  The series allows students to attend lectures and engage in small group discussions and one-on-one interactions with professors representing a wide range of academic disciplines.

The lectures are open to public and come as part of NU-Q’s mandate to serve as a central hub for thought leadership for media in the region.