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Friday, 22 May 2015

Privatising government monopolies

In my April 27 blog I wrote about the continued success of family business. Family businesses are the best example of private companies in which ownership and management is in the same (family) hand. Listed companies are private companies in which ownership and management are separated although there are some interesting phenomena (e.g., Heineken).

In general, private companies have a better performance than public companies as they enter a competitive market with many similar suppliers. Success is ultimately based on the survival of the fittest. In general, public companies are - directly or indirectly - owned by the government and perform services to the general public and competition is remote or absent. Usually we refer to such a company as a (state owned) monopoly.

By default, monopolies dictate the market in respect of prices, conditions and deliverables. Private monopolies have the perfect situation for maximising profits, minimising services, and no one to account to. Public monopolies are restrained from maximising profits and minimising services as it is not in the interest of the political parties which are accountable for through the political general election process.

Hence, privatisation of state owned monopolies into private monopolies in the absence of future competition, is like the worst joke ever.

Recently, the Dutch Parliament has started an investigation on the purchase of Italian high speed trains. This political investigation is the consequence of the decision of the Belgian and Dutch railroads to return the already purchased trains and to annul the purchases of the remaining trains.

The Dutch railroads used to be a public company and a public monopoly until it was privatised in 1995 and competition was welcomed by the Dutch government. Yet, the full ownership remained with the government. The start of a complicated relationship.

The current misery with the Italian high speed trains results from (1) a disputed public tender for the Dutch high speed rail road track, and (2) the purchase of Italian high speed trains with a poor reputation for reliability. Interestingly, the French high speed trains run smoothly while using this same Dutch high speed rail road track but with French high speed trains.

Recently, Mr Jan Timmer, the former CEO of Philips Electronics and the former Chairman of the Supervisory Board of the Dutch railroads (1996-2001), made some interesting comments during this political investigation: "the privatisation of the Dutch railroads is the root of all evil". He also said that The Netherlands is too small as a country to have multiple train operators. Multiple operators on one rail road track is "utterly impractical and unrealistic". Pushing the rail road privatisation is the main reason for the current misery with the Italian high speed trains. (Volkskrant)

Groucho Marx: "Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies."