DEREGULATION AND PRIVATISATION IN THE SERVICE SECTOR

by : Lens H0j, Toshiyasu Kato and Dirk Pilat

(Published by : OECD Economic Studies, No. 25, /995/11)

INTRODUCTION
Since the early 1980s, structural reform programmes have been implemented in all OECD countries. Although varying in scale and scope, a common aim of these reforms was to improve overall economic efficiency and flexibility, hence enhancing the adaptability of firms and markets in the face of major economic shocks. Thus,
reforms were at least partly based on the assessment that previous regulatory regimes adversely affected the ability of economies to adapt (OECD, 1994). Given its large and growing share of OECD output and employment, the service sector has increasingly become the focus for structural reform programmes.
While trade is crucial in shaping competition for manufactured goods, many services are not exposed to a high degree of external competition. Therefore, deregulation and privatisation are the key to shaping competition for services and the main elements of structural reform. Even if services are exposed to international competition, domestic producers often tend to have strategic advantages over foreign competitors, such as closeness to the market or a dominant market position.
In addition, since services are often produced on the same place as they are consumed, international competition in services depends in many cases on the establishment of outlets in each specific market. In itself, this may create an entry barrier, to the extent that there are constraints on foreign direct investment.
The character of competition differs between service sectors. They tend to be either highly fragmented or concentrated into natural monopolies or oligopolistic markets (Oliveira-Martins, 1994; EC, 1993). Examples of fragmented service sectors are retailing, restaurants, road transport and professional and personal services.
These sectors are typically characterised by atomistic or monopolistic competition, althaugh the nature of competition can be affected by government regulations, or rules imposed by professional organisations and associations. Public utilities, communication and railways are generally characterised by oligopolistic (segmented) market structures, due to high sunk costs - resulting from the need to invest in infrastructure - economies of scale or network externalities. In some' cases, a "natural" monopoly may exist, partly arising from network externalities, and governments have in the past often created public monopolies to avoid abuse of market power, limit inefficient entry' or ensure universal access to networks.
This paper discusses some of the available evidence on the impact of regulatory reforms and privatisation in enhancing competition in the E service sector. Because aggregated (or macro) measures of performance in the service sector tend to be somewhat unreliable, inter alia because of well-known measurement problems, the focus here is on micro-based data. The first section discusses some of the broad trends in regulation and deregulation. The second section first discusses the impact of regulations in fragmented sectors, focusing on distribution, construction and road transport. In these sectors, regulatory reform of entry barriers should in principal ensure sufficient competition, so competition policy is only seldom required to prevent anti-competitive conduct. The second part of this section discusses the impact of regulation and public ownership in segmented sectors, primarily focusing on the experience of telecommunications and airlines. In these sectors, regulatory reform generally needs to be accompanied by competition policy, to ensure that incumbents do not abuse their market power and that competition is actually enhanced following deregulation. The final section discusses changes in the overall regulatory

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