The cannibalisation of natural monopolies
Monopoly power is the Achilles heel of a laissez-faire economic system. Adam Smith, for many the father of capitalism, was one of the very first to warn about the dangers from the evolution and emergence of monopolies and cartels in a free economy.
Smith argued that as “consumption is the sole end and purpose of all production the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”. Public policy should therefore be clearly to serve consumer welfare. However, according to British politician and author Jesse Norman “far from promoting the interests of the consumer public policy had often done the opposite; restricting competition and encouraging producers to come together through trade privileges, guilds, public registers, welfare funds and the like” .
In current neoliberal economies, private sector producers invariably seek and often manage to attain to extract rents and earn super-normal profits through crony Public-Private Partnership (PPP) agreements which are put together by bureaucrats and politicians haphazardly and presented as serving the public interest. More often than not however these PPP agreements often target and succeed to cannibalise the natural monopolies through having the private sector company undertaking the project being granted concessions that are against the public interest.
Economic evaluation and stakeholder analysis
This is indeed why it is imperative that any proposed public sector project above a minimum capital expenditure should be subjected to an independent and objective economic appraisal that is immune from any political influence or other interference. This is particularly important where a concession is to be granted to a private sector party that gives rights to the concessionaire to operate a natural monopoly (such as a road, a port or airport, a water or power plant, a desalination unit and so on).
In Cyprus, vivid examples are the airports and the commercial port of Limassol. Bureaucrats in both instances seemed to have negotiated and agreed to concessions that is tantamount to giveaways that do not seem to be transparent and are hardly in the public interest. In the airports a substantial annual penalty was agreed payable by the taxpayer to the private sector party undertaking the operation of the airports for as long as the Tympou (Ercan) airport in the occupied areas is operating. Similarly, with the only commercial port of Limassol (a vital natural monopoly), as it has recently become apparent, the concessionaire was granted the right to increase the charges without any regulation or possible recourse from the granting authority.
The appraisal should also identify and evaluate the costs and benefits accruing to the various stakeholders in such projects so as to enable a fair and balanced agreement. In effect, a stakeholder analysis shows the net present value expected to be accruing to each party and the risks associated and to be undertaken by a partner in a concession contract.
Last but not least, the public authority should further put in place adequate regulation and appropriate checks so as to ensure that the consumer does not suffer from a concession granted to a private sector entity. It is therefore imperative for the public sector party in such contracts to have and be able to apply the necessary checks so as to effectively monitor and control the outcome as it affects the consumer for the duration of the venture while fully reserving the right to intervene as it may be deemed necessary to protect the consumer.
The need for an independent Development Finance Agency
A directive by the European Union to all member countries which many countries have adopted has led to the creation of completely independent from political or other influence of national Development Finance Agencies (such as in Ireland and the Netherlands) . In such countries, by law it is illegal for government or a public sector entity to enter into any such ventures without first the project being vetted as economically viable and the partnership deemed to be in the public interest by the Development Finance Agency.
The need to depoliticise the process of evaluating and agreeing PPPs so as to ensure that they serve the interests of the consumers at large is not a luxury or even an option for public sector entities. It is a must in order to ensure that vital economic services in a free economy remain competitive and keep serving the consumer. Without it, the result is crony capitalism and the creation of unnatural private sector monopolies and cartels that serve rentiers and those seeking to extract supernormal profits rather than to serve the welfare of the people.
- Jesse, Norman (2018), “Adam Smith, what he thought and why it matters”, Penguin Allen Lane 2018.
- Kavvadia Helen and Savvides Savvakis (2019) “Funding Economic Development and the Role of National Development Banks-The Case of Cyprus“, World Economics Journal, Vol. 21, No. 3, July–September
Savvakis C. Savvides is an economist, specialising in economic development and project financing. He is a former senior manager at the Cyprus Development Bank and has been a regular visiting lecturer at Harvard University and currently at Queen’s University. Author page: http://ssrn.com/author=262460.