In Section 9.2 a few examples were given of the problems of liberalising markets when the regulation of a natural monopoly common carrier was required. Here we consider a number of other areas in which liberalisation has been pursued, but which are not associated specifically with the policy of privatisation.
Reference was made in Section 3.8.1 to reforms, similar to those in the US, which permitted entry into the express coach and bus service industries. In this field, liberalisation was closely associated with deregulation. Similar changes have also occurred in the provision of professional services. Changes here have been stimulated, in part, by the extension of monopolies and restrictive practices law to the professions.
Until 1985, solicitors in the UK had a legal monopoly of conveyancing. The argument that this was a necessary form of consumer protection was difficult to sustain, and the interest of the house-owning public was sufficiently at stake to force reform.
A similar case concerned opticians who had a legal monopoly to dispense spectacles and rules which restricted advertising by their members. The medical argument for this system was extremely weak, there being little danger to consumers from freer entry. The Health and Social Security Act 1984 permits the sale of spectacles by unqualified individuals to people with a prescription from a qualified doctor or optician.
Some important liberalising changes have taken place where restrictive regulation was not imposed by the state but was enforced by custom, by common law conventions, or private professional groups without the sanction of statute.
Liberalisation of Stock Exchange rules followed an investigation by the Director General of Fair Trading of The Stock Exchange rule book. The most important issues concerned the fixing of minimum brokerage fees and the system whereby ‘market makers’ or ‘jobbers’ dealt indirectly with brokers acting on behalf of members of the public. The system was defended on the grounds that it prevented conflicts of interest arising and protected the general public. It was criticised on the grounds that, in the modern electronic age, it was an inappropriate method of consumer protection and was in practice more a way of obtaining monopoly profits. Under pressure from the restrictive practices authorities, the Stock Exchange reformed its rules. In October 1986 (the Big Bang) brokerage commissions became competitively determined and broker-dealers were permitted. It is instructive to note that minimum brokerage fees had been abolished by the Securities and Exchange Commission in the US in 1975. With the cost of dealing on foreign stock exchanges falling, and with the abolition of exchange controls in the UK in 1979, business was being lost to New York. These competitive pressures from overseas played an important role in increasing pressure for liberalisation in the UK
Franchising as a solution to the natural monopoly problem has not been considered feasible in the context of the management of gas pipelines, the national electricity grid, or the main telephone network. The reasons for this were considered in Section 3.6. They relate to the contractual difficulties of specifying obligations, adjudicating in the event of disputes and valuing capital assets at contract termination. In complex and heavily capital intensive operations, the difference between regulation and franchising is in practice likely to be small.
There are areas in which such problems, although present to some degree, are more tractable. Some local authority services, for example, have been supplied using competitive tendering.
Refuse collection is probably the most frequently cited example of a service which is appropriately provided by competitive tendering. Before 1988, local authorities could choose whether or not to adopt a competitive tendering policy in this area and therefore it has been possible to compare the performance of contractors and direct labour organisations. Competitive tendering has been estimated to reduce costs of collection by about 20 per cent. As noted in Module 8, costs may fall because technical efficiency has increased (higher output for given inputs), because productive efficiency has increased (using a less costly combination of inputs), or because the prices of inputs have fallen. A study of the technical efficiency of refuse collection found that the mean technical efficiency for private contractors was 17 per cent higher than for authorities that did not tender, and that cost reductions could not be ascribed to lower wages or fringe benefits.
The use of private contractors does not always imply conditions of natural monopoly. The choice between market contracting and the provision of services by factors of production employed within an organisation is a choice which is faced by all institutions. Any firm must decide, for example, whether to make certain components or to buy them. For profit-making firms the main determinants of this decision will be the relative costs of specifying the goods or services required in a contract, checking their quality and avoiding the hazards of renegotiation as time advances, compared with the costs of monitoring and other internal incentive devices.
In the public sector, bureaucratic methods of supply inevitably create problems in providing incentives for productive efficiency (see Modules 7 and 8). Internal monitoring may therefore be expected to be less effective in a bureaucratic and non-profit enterprise than in a profit-making one. This in no way implies that all organisations should be profit-making. It does suggest, however, that consumers of publicly provided services may find it in their own interests to insist that some components of these services are contracted out. There will still be some point at which internal organisation is preferred even by consumers to external contracting, but it is not clear that those operating the bureaux will be trusted on their own to determine where that point is.
Since 1980 local authorities in the UK have been required to run their direct labour organisations (DLOs) as trading bodies with separate accounts. Directly employed staff of local authorities have had to compete with private contractors for most building and maintenance work. The principle has been carried further in the Local Government Act 1988 which extends the requirement of competitive tendering to other ‘defined activities’ including refuse collection, building cleaning, other cleaning, catering for schools and welfare, other catering, ground maintenance, and vehicle maintenance. The management facilities in the field of sport and leisure are also subject to competitive contracting.
Local authorities are not the only organisations to experiment with contracting out. Many National Health Service Hospitals have contracted out their domestic services, such as cleaning and housekeeping. A study by the National Audit Office in 1986 estimated that the competitive contracting process in the area of support services yielded cost savings of around 20 per cent.
