Playing the right music!

Stairway to heaven, highway to hell

One may get inspiration from the two beautiful songs of rock bands Led Zeppelin and AC/DC. When the Italian government decided to sell some of the house jewels back in the late ‘90s, most probably the Led Zeppelin soundtrack was playing in the boardrooms of policy makers. The sweet guitar and flute notes were accompanying the elaboration of financial projections of rich cash inflow into the state coffers. Fresh vitamins the sick public debt (over 127% of GDP in 1998) urgently needed. By 1999, from the sale of Enel, Telecom, Società Autostrade and a few other gems, the Italian government pocketed some 80 billion units of the new currency just being launched across Europe, the Euro. A figure that would increase to 120 billion by 2006.

Many are the benefits deriving from a massive privatization program such as the one Italy executed in the ‘90s. Besides the evident injection of vitamins mentioned above, the main idea of privatizations is that private “econs” (i.e., private economic agents which are supposed to be more rational and capable than the State) will increase the efficiency (productivity) of the company, the overall quality of its organization, products and services and overall create more value for the consumer, reflected by more competitive prices. That is the stairway to heaven.

The economic theory has studied the different types of competitive markets and, we can say, it largely supports the advantages of a privatized economy, in which the role of the State is limited to selected functions, where there is an evident and non-transferable national interest (for instance the defence of the territory) or where there is no possibility to create competition, which is the case of natural monopolies.

You don’t have to be an economist to understand the intuitive concept of natural monopoly. It is a monopoly in the sense that one and only one organization can provide that product or service; it is natural because it is in the nature of that specific business that you simply can’t have two or more players if not at unacceptable costs. Initial investment to install the (huge) fixed assets required to run that business is too high. Consider a railway between two cities: if I own the first existing track, are you going to build a second one to compete against me? Okay, maybe your instinctive answer could be “why not” (you are not an economist, after all), so just take my word on it: you don’t want to embark in such a construction work (especially in today’s green world). Managing a railway, managing a highway, managing the drinkable water distribution system, are examples of natural monopolies. It is not possible to create a competitive market of railways, highways, water distribution. What you can do, though, is to build competitive businesses in the use of those infrastructures. In fact, two or more companies could run their trains on the rail tracks of the monopolist. Running trains can be a competitive business. Managing the railways cannot. Running service areas along the highway can be a competitive business. Running the highway itself cannot.

[Interval - the soundtrack changes to the AC/DC’s Highway to Hell]

Nearly 20 years since the privatization of Società Autostrade (the Italian owner of the most important highway network in the country), an accident occurred which caused the death of 43 people, the crash of the Morandi Bridge in the city of Genova. It was a turning point, suddenly and tragically showing how the path to heaven can actually turn into a fast track to hell.

Looking back, the privatization of Società Autostrade should have raised more questions before deciding it. For example, receiving a high sale price: was it really good news for the State? The (private) investors were certainly expecting a return on that investment, a return that could only come from exerting the monopolistic extra profit. Imagine you own the Highways in your country; would you not charge high, very high, fares for the travellers when they have no choice but to use your highway? And would you not keep the maintenance work at the legal minimum, to save money? That is probably why in the rest of Europe highways are still owned and managed by the State. The Italian government privileged the immediate benefit of receiving cash against the long-term and sustainable mission of providing a proper (safe, fairly priced) service to the consumers. A problem that returned to the Italian government, but increased in size.

[Conclusion – how about Pink Floyd’s High Hopes?]

The privatization process that took place since the ‘90s has left mixed results and feelings, at best. Even without the giant debt generated by the Covid-19 pandemic, the Italian public debt had increased over the decade following the state divestments. The 120 billion apparently made the effect of an aspirin on the sick Italian patient. And, what is worse, significant investments are now needed to upgrade the privatized infrastructures. The level of quality for the customers certainly didn’t improve either. Not the good-looking picture that the decision makers anticipated back then.

Commenting on the Italian privatizations in 2008, economist Stefano Micossi wrote “a second unsatisfactory result from privatizations pertains to market conditions in the performance of the main public services which have been privatized. The key point that summarizes it all is the general price increase and profit increase of those companies, in combination to which there was no significant improvement in the technologies neither in the quality of the provided services”. It is not something our country should be proud of.

[Original Italian text of the author: “Un secondo risultato poco soddisfacente delle privatizzazioni riguarda le condizioni di mercato nella prestazione dei principali servizi pubblici privatizzati. Al riguardo, il dato saliente che riassume quanto accaduto è l’aumento di prezzi e dei profitti delle aziende collocate sul mercato, al quale non ha però corrisposto un miglioramento significativo né nelle tecnologie, né nella qualità dei servizi prestati” Italianieuropei 2/2007, Le privatizzazioni in Italia: qualche utile lezione, written by?Stefano Micossi?Friday, 29 February 2008 20:39.]

The less direct effect of a bad privatization such as Società Autostrade consists of the negative publicity it does to free economy, liberalism and privatizations themselves. It encourages the political view that state-owned and state-intervention is preferable. Let’s hope better political judgement will inspire future decisions between private and state-owned. Hope should be the last to die, and we have high hopes indeed, provided we learn from past mistakes.