The trade off between allocative and economic efficiency poses a question about the regulation of public utilities. It’s known as empirical knowledge that PSUs are more allocatively efficient and private firms are productively efficient. The scenario is however changing. The PSUs remain efficient in provision of low cost services like transport, but private players like Reliance are disrupting the markets by introducing low cost products and services like Jio. Does it still make sense to retain control over provisions made by government entities?
An example of efficient public facilities is the Delhi Metro. The Delhi Metro is built and operated by the Delhi Metro Rail Corporation Limited. DMRC is a state owned company with equal involvement of the state and central government.The Delhi’s Metro network is known for a fact that it is nothing short of a world class public transportation facility. Comparing Delhi Metro with its counterpart, the Mumbai Metro, which is operated by Metro One Operation Private Limited (MOOPL), a joint venture between a French company and Reliance Infrastructure, it can be clearly seen that the state operated metro service although being cheaper provides, if not better, equally good facilities in terms of time-compliance, cleanliness etc.
Another advantage that public enterprises have is the prevalent outreach created by the existing infrastructure. India Post Payments Bank is an example of how a natural monopoly will always be more allocatively efficient. With 1.54 post offices across the country, IPPB is the most accessible banking network in the country. By fine tuning the infrastructure of post offices to suit the functions of a bank and cooperation with other private sector banks,enterprises and financial institutions, IPPB will now be able to complement rural development by making financial inclusion a reality. Beneficiaries are not only the people but also government welfare promoting schemes such as MNREGA.
Private enterprises have not been allocatively efficient in the past because of difficulties of factor mobility which is now resolvable. Services like Reliance Jio have penetrated the country not only in price terms but also the outreach. Also by providing the most high end infrastructure at highly affordable rates, Reliance telecom has set an example of allocative efficiency at its best.
Natural monopolies which arise from sheer size are bound to have a positive impact on the consumption as they reduce price to a level which can not be competed. This is sheerly because of the capital available with private enterprises. Excess profits and capital of large enterprises such as reliance usually are reinvested in large projects only. These investments can reduce price of services quite significantly so why not channel it where welfare is maximised? Government owned enterprises usually rely on money from government collected from taxes to be able to invest. Most of the time this money is not even earned by these enterprises. The burden of their expenditure is indirectly faced by the taxpayer and results in a budget deficit.
Larsen & Toubro is one of the cheapest road builders, is given a large number of highway and other roadway tenders. The major driver of its efficient production is something not all firms may have. Experience and personnel to conduct R&D. R&D is a major priority of private firms with profit maximizing incentives, which allows them to reduce costs and hence increase profits. PSUs seldom do so as they lack incentive of increasing productive efficiency as alot of them are regulated monopolies. They are also subject to regulations of laws such as reservation which forces them to hire inefficient workers and disallows them to dismiss the same. This leads to increased bureaucracy which further hinders the firm’s productivity. Private sector contrarily mostly only recognizes merit.
The extent to which PSUs should be privatized remains questionable; it is subjective to every firm and industry and no definitive verdict can be given.
An example of efficient public facilities is the Delhi Metro. The Delhi Metro is built and operated by the Delhi Metro Rail Corporation Limited. DMRC is a state owned company with equal involvement of the state and central government.The Delhi’s Metro network is known for a fact that it is nothing short of a world class public transportation facility. Comparing Delhi Metro with its counterpart, the Mumbai Metro, which is operated by Metro One Operation Private Limited (MOOPL), a joint venture between a French company and Reliance Infrastructure, it can be clearly seen that the state operated metro service although being cheaper provides, if not better, equally good facilities in terms of time-compliance, cleanliness etc.
Another advantage that public enterprises have is the prevalent outreach created by the existing infrastructure. India Post Payments Bank is an example of how a natural monopoly will always be more allocatively efficient. With 1.54 post offices across the country, IPPB is the most accessible banking network in the country. By fine tuning the infrastructure of post offices to suit the functions of a bank and cooperation with other private sector banks,enterprises and financial institutions, IPPB will now be able to complement rural development by making financial inclusion a reality. Beneficiaries are not only the people but also government welfare promoting schemes such as MNREGA.
Private enterprises have not been allocatively efficient in the past because of difficulties of factor mobility which is now resolvable. Services like Reliance Jio have penetrated the country not only in price terms but also the outreach. Also by providing the most high end infrastructure at highly affordable rates, Reliance telecom has set an example of allocative efficiency at its best.
Natural monopolies which arise from sheer size are bound to have a positive impact on the consumption as they reduce price to a level which can not be competed. This is sheerly because of the capital available with private enterprises. Excess profits and capital of large enterprises such as reliance usually are reinvested in large projects only. These investments can reduce price of services quite significantly so why not channel it where welfare is maximised? Government owned enterprises usually rely on money from government collected from taxes to be able to invest. Most of the time this money is not even earned by these enterprises. The burden of their expenditure is indirectly faced by the taxpayer and results in a budget deficit.
Larsen & Toubro is one of the cheapest road builders, is given a large number of highway and other roadway tenders. The major driver of its efficient production is something not all firms may have. Experience and personnel to conduct R&D. R&D is a major priority of private firms with profit maximizing incentives, which allows them to reduce costs and hence increase profits. PSUs seldom do so as they lack incentive of increasing productive efficiency as alot of them are regulated monopolies. They are also subject to regulations of laws such as reservation which forces them to hire inefficient workers and disallows them to dismiss the same. This leads to increased bureaucracy which further hinders the firm’s productivity. Private sector contrarily mostly only recognizes merit.
The extent to which PSUs should be privatized remains questionable; it is subjective to every firm and industry and no definitive verdict can be given.
