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August 27, 2008

Comments

Gerald

As you start down the privatisation path it is worth noting that it does not solve all problems, and in fact introduces its own set of problems.

The privatisation of British Rail was a mess, and in fact the British government now spends a lot more money subsidizing the private rail system then British Rail ever received, as well has having to re-nationalize part of the system due to the failures of the private sector that endangered the entire rail system.

Even in areas where privatization works, you have to remember that the actions of the company are all based on (short-term) profit even if this is contrary to the public good. The 2003 blackout in North America was caused by a lack of maintenance by a private company, presumably to save money.

The US has the some of the worst, if not the worst, level of high speed Internet connectivity in the developed world. This is because the government does not provide any oversight, and the companies can't be bothered to make the investments necessary because the won't provide a "sufficient" return on investment.

Which isn't to say the privatization is a bad thing, but rather to make sure that the government puts into place the regulations to ensure that the new owners are forced to act in the interest of the public where necessary, as well as accepting that in other areas service will degrade or disappear as the cost exceeds the revenue.

larry smith

I appreciate the fact that regulations are necessary in a privatised environment. And I know there were problems with the sell-off of some British state assets.

However, maintaining the status quo in the Bahamas is a recipe for disaster - as a developing country we simply cannot afford to throw hundreds of millions of dollars down the drain year after year.

And I don't think we could expect services to degrade any more than than they already have under 'public' control.

Erasmus Folly

@Gerald
It is disingenuous to point out the few failures of privatization as boogey cases in this country, while maintaining that privatization is a good thing. One would be better served by making two very clear caveats when advocating privatization:

1. Privatization requires intelligent people to break state owned monopolies and create a market situation that works to the benefit of citizens/customers, while allowing the new companies to make a profit. Profit isn't evil; without profit there is no reinvestment and no progress.

2. Privatization that simply transfers a state owned monopoly into the hands of a privately held monopoly is useless. The idea is to foster competition in the market - that is what drives down prices and drives up quality service.

Take the radios as an example of these 2 points: if Hubert Ingraham had simply privatized ZNS radio and handed it over to a private group - we would never have had the explosion in media that we did have. However, his genius was in opening up the radio waves to private competition. The key is to privatize and open up the 'sector', not the monopoly. We seem to be lost in a love affair with privatization while not comprehending the economic reality that makes it work, namely market competition. Sadly, ZNS radio never seemed to have got the memo and they still plod along with shoddy service and heavy subsidies. They proved themselves to be the dinosaur everybody knew they were.

We need to eliminate our other dinosaurs now, but if we hand them over as they are, we risk private monopolies extracting profits, but with no motivation to improve service, to reinvest. Privatization without competition won't solve our problem. We are naive to think it will.

@Larry

GREAT ARTICLE AS ALWAYS!

vinkie

"Privatization without competition won't solve our problem"

So why don't they consider just opening up the sector and let the competition get started already?

If an all-cellular telecommunications company started up here they'd just build some towers and not have to even touch BTC's poles and wires and if they wind up providing significantly better services then the people will migrate to them. The COMPETENT employees at BTC would get hired in a heartbeat and then BTC would have no choice but to die a natural death because their lack of quality service caused a lack of income.

Well, maybe not totally die. Perhaps just devolve into a maintenance crew that takes care of the poles and wires and any future telecom companies that choose to provide land lines would pay an annual fee to BTC to help pay for the maintenance.

larry smith

Only problem with that is that the government would like to realise a return on the sale of its asset, which would help with other budgetary priorities.

The longer a period of exclusivity a privatised BTC gets, the higher its value. But that means less competition. So a balance has to be struck.

I believe that is one of the reasons they are willing to sell a majority stake - to get more return and keep the exclusivity to a minimum.

drew Roberts

"So why don't they consider just opening up the sector and let the competition get started already?"

Indeed, I was saying back during the first go around that they should take the monopoly laws off of the books and GIVE Batelco to the workers. If they couldn't compete with the head start of an existingg customer baseand infrastructure...

all the best,

drew

drew Roberts

@vinkie

The poles are BEC's not BTC's right?

drew

Bob Knaus

But... Drew... BTC isn't owned by its employees, it's owned by all Bahamian citizens. Shouldn't they get something of value for their ownership stake?

Perhaps the union would like to put in a bid for BTC. Similar things have been tried elsewhere.

If that does happen, here's a bit of financial advice... make sure the price you pay for BTC bonds takes a significant chance of bankruptcy into account. That often occurs when employees and shareholders are the same people.

drew Roberts

"But... Drew... BTC isn't owned by its employees, it's owned by all Bahamian citizens. Shouldn't they get something of value for their ownership stake? "

But... Bob... I know and I am a Bahamian citizen and I still say GIVE it to them. But only after the laws change. The FNM first came to power in 1992. That makes about 16 years of telecoms monopoly too long and I don't have much hope of it really ending. I rather it end.

I understand it is a radical move, but...

all the best,

drew

Bob Knaus

Drew - I gotcha, basically you are saying that if the telecom monopoly laws are repealed then BTC will be worthless to outside investors anyway, so why not just give it to the employees.

Do you think the employees would want it, on those terms?

Supposing the only way for BTC to avoid bankruptcy in a competitive marketplace was to get rid of half its employees. Do you think an employee-owned business would take that step?

There is a strong argument in favor of this scenario BTW. It says that the benefits to the Bahamian public of unrestricted telecom markets will far outweigh foregone revenue from the sale of BTC and the social costs of the organization eventually going under. Is it one that you think the current government, or any future one, is likely to make?

drew Roberts

Bob,

not exactly. I am just saying that it may be and I think certainly would have been the quickest way to do the most good for the Bahamian people.

I think BTC would still have value even in the absence of the monopoly laws. So it is not that. Less value, sure. Monopolies tend to have value that they shouldn't. Imagine the value of my company if the government should grant me a monopoly on importing food!

"There is a strong argument in favor of this scenario BTW. It says that the benefits to the Bahamian public of unrestricted telecom markets will far outweigh foregone revenue from the sale of BTC"

That I think is it in a nutshell.

"and the social costs of the organization eventually going under."

I am not so sure it would go under. I think we Bahamians have more abilities than we give ourselves credit for in public on a day to day basis.

And you would have to rig the deal such that they could not just sell the shares that they got. They would have to actually work it.

You would also have to set things up so that BTC would not be at a disadvantage because of the new laws too though. (A disadvantage because of poor planing or poor attitude, or poor service, ok.) Our government often passes laws which put us Bahamians at a disadvantage with respect to non-Bahamians and that is folly and they need to stop it. I think they mostly do it out of ignorance, but that is no excuse for them.

"Is it one that you think the current government, or any future one, is likely to make?"

Unfortunately, no. But I keep mentioning it in the hopes that it may do some good at some point.

all the best,

drew

Erik

@ Drew & Bob
One of the problems with the "open up competition now and give BTC to the employees" idea is the potential loss of any semblance of a functioning communications infrastructure, which we have now. While not ideal -- far from it -- I can usually pick up my home phone, dial a number and get through to the destination, whether that is to order a pizza or call a friend in Europe. It works. (Getting my cell call to stay on while driving down the highway...that's another matter... :)

So my concern is with the "in between time" -- what happens between *giving it to the employees* and having sufficiently functioning competition (that is, a reasonable alternative service) BEFORE BTC gets driven into the ground? Striking that balance Larry spoke of is the real trick. While the new competition is trying to gain market share how do we know the new owners of BTC (the employees, in this scenario) can keep my calls working along the way?

Not trying to sound totally negative here, it's just that I often think those transitional periods are overlooked when talking about possible solutions for these infinitely complex matters.

~ejr~

Erik

@Larry

Great article. I love the ones that recount these vital historical moments of our country. I keep 'seeing' the TV mini-series...

If we could only get funding. Hmmm, maybe Mr Farquarson would like to invest?

~ejr~

Bob Knaus

Stepping back and looking at the bigger picture (and I do hope I am not offending anyone's intelligence by rehashing Econ 101) I think the issues revolve around "What is a natural monopoly?"

There aren't very many, and new ones do not appear very frequently. Most people would name water, sewer, electricity, roads, and telephone amongst them. They are the services which virtually everyone needs, and for which the costs of contructing multiple competing infrastructures would negate the normal cost-lowering effects of competition. Two electric companies, with two sets of poles and wires and generators, cannot possibly deliver power more cheaply than a single wisely regulated monopoly.

Larry has championed deregulation of the media, which few would say is a natural monopoly. No thinking person could disagree with him.

I hear complaints about Bahamian power and water authorities, but few people seriously consider privatizing them.

Telephone is a special case. Technology has changed so that it is no longer a natural monopoly. But a huge investment in old-school infrastructure remains, and not everyone is ready to go wireless and digital.

Since telephony is in the midst of change, that makes it especially hard to devise "rules" which will determine the success or failure of a particular enterprise. Who can tell what the whizzes in Silicon Valley will come up with next?

My comments on the probability of BTC bankruptcy are not a reflection on the skills of BTC employees, and they are most DEFINITELY not a reflection on the ability of Bahamians as a nation! They simply take into account a common "agency problem" where the interests of a person as a BTC employee may conflict with their interests as a BTC shareholder. Consider the fate of American versus United Airlines in the post-9/11 period. Which one went bankrupt? Which one was employee-owned?

drew Roberts

@ejr

Well, if we ever seriously consider a plan like I propose (somehow I doubt it even though I think doing it back then would have left us in a better position by now & etc.) then we can look to solve those issues. Put the shares in trust for the present employees, give them their dividends from profits, but keep the present management and oversight structure in place until the competition has ramped up?

all the best,

drew

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