Silviase/jgov_v1.4_full_ann huggingface dataset:
ownership transfers to concerns about the development of the regulatory environment. And, while it is not appropriate to go into detail in an overview paper such as this, some of the aspects of current controversies in the UK can be illustrated by reference to some of the developments in electricity regulation.

When the electricity industry was privatized, wholesale prices of bulk power were deregulated. A power pool was created in which generating companies would bid on a daily basis to supply power to the wholesale market. However, operation of the power pool has given rise to a whole series of difficulties and incumbent generators have been constantly accused of manipulating prices. Eventually, in early 1994, the Director General of Electricity Supply (DGES) responded by introducing a two year price cap on average pool prices. Thus, what had been deregulated at the time of privatization has been subsequently re-regulated.

More generally, there have been widespread complaints about the post-privatization levels of electricity prices and about the associated high levels of profit made by a number of the new companies. The DGES completed a review of distribution charges in the summer of 1994 and announced new, tighter price-caps on the relevant companies. However, following a bid for one of the distribution companies in early 1995, the DGES decided that he might not have been tough enough in his 1994 review and announced that he would reconsider those earlier decisions. $ ^{4} $ This reconsideration of the outcome of the distribution price review did, of course, violate one of the fundamental principles of the RPI-X approach to regulation, that, once made, pricing decisions remain unchanged for a period of several years. The DGES's behaviour has, therefore, given rise to a lively debate about the effectiveness of the UK system of utilities regulation.

### 7. Assessment

The post-1979 history of the UK is a fascinating case study for anyone interested in microeconomic policy making. A rich mixture of reforms have been implemented across a range of industrial sectors. Various combinations of industrial restructuring, ownership transfer, liberalization, deregulation and regulatory reform have been tried, and within each of these major headings there have often been significant differences in the options chosen from one situation to another. Some general points can, however, be extracted from the kaleidoscopic detail of policy practice.

For much of the period, ownership transfer has occupied centre stage. The reason for this is not that ownership is the major factor influencing economic performance but rather that it is ownership transfer that produces the most immediate macro-economic and macro-political effects.
The sale of SOEs raised billions of pounds for the Government, funds which first enabled it to finance an awkward fiscal deficit and later provided it with a justification for cutting taxes. Even today, the timing of the prospective sales of Railtrack and Nuclear Power is heavily influenced by fiscal considerations, particularly the prospect that they may provide some scope for tax cuts before the next election.

Sale of SOEs by means of stock market flotations has also enabled the Government to gain political advantage by redistributing resources to key groups of voters. This has been done by the simple mechanism of underpricing shares whilst simultaneously ensuring that the allocation mechanisms then needed to ration excess demand channel a substantial proportion of the available shares to large numbers of small investors.

In contrast to these “macro” effects of privatization, the political gains from policies such as deregulation, liberalization and regulatory reform tend to be more diffuse and more spread out over time. As a consequence, such objectives have often had to take second or third place behind the fiscal and redistributive goals of public policy. In the longer term, however, it is the changes in regulatory structures and in market competition that have the more profound implications for economic performance, both in the sectors concerned and, ultimately, in the economy as a whole. And, although such considerations have not generally been the priority on short-term political agendas, there have nevertheless been a number of major advances in these areas.

Among the positive features of the post-1979 UK experience, I would list the following factors:

1. The delegation of regulatory functions to specialised agencies which, although part of government, are semi-independent of the day to day pressures faced by ministers and their civil servants.

2. The assignment of duties to promote or facilitate competition to the new regulators, in recognition of the problems of transition faced in moving away from state-owned, state-controlled monopolies.

3. The recognition, embodied in regulatory structures (and also in some of the new industrial structures), that competition can be both feasible and effective in large areas of economic activity that were previously thought either to be naturally monopolistic or to be subject to other market failures that justified the suppression of competition via the creation of statutory entry barriers.

4. The improved economic performance that has resulted when monopolistic market structures have been broken down and supplanted by more competitive and less centrally controlled market processes.

On the other hand, not everything has been positive. Apart from the aforementioned tendency to place deregulation and liberalization objectives second or third, the negative factors
include:

i. Early Government naiveness about regulation, particularly the notions that simple RPI-X regulation was all that was needed effectively to control monopolies.

ii. A tendency for the Government to seek to “manage” emerging competition -- as in the duopoly policy in telecoms and the multi-airline policy in aviation -- rather than to seek only to establish conditions in which competition can exist.

iii. Failings in the structure of regulation that have led in many instances to increasingly intrusive regulation rather than to deregulation.

iv. A tendency for most of the early performance gains arising from the new policies to be channelled to shareholders and managements, sometimes leaving consumers worse off (egs. water and electricity) and thereby weakening longer term political support for pro-competition policies.

The first two of these weaknesses are now largely irrelevant, but the second two are very much at the centre of current political debates in the UK. It is widely recognised that there are few checks and balances in the UK regulatory system, and that therefore the general duties given to the various Directors General allow regulators very considerable discretion in deciding how they should approach their tasks. There is, however, no consensus as to how the regulatory system might be changed, and some of the proposals for reform (such as increasing the degree of political supervision of regulators) threaten a move backwards which would tend to undermine major benefits of existing arrangements.

The failure to deliver a larger share of the benefits of improved industrial performance to consumers, particularly in the water and electricity industries, has led to a growing attack on RPI-X regulation. An alternative -- now being advocated by the Labour Party, evaluated by the gas regulator, and already operated to some extent in water and electricity -- is a sharing rule whereby when profitability rises above some threshold level the regulated company will be required to make price cuts to the value of, say, half the excess profit. Compared with the RPI-X approach this would arguably generate lesser incentives for immediate cost reduction (since part of the gain might be taken away immediately in the form of lower prices). In compensation, by giving rise to a more acceptable distribution of benefits, it may have the positive effect of reducing the incentives of politicians to intervene, not just in respect of prices but also in relation to other aspects of the regulated firm's conduct.

These last two paragraphs indicate an important point. Post-1979 UK micro-economic policy marks a radical departure from what went before and many of the changes have been experimental in nature. There is still a good deal of learning going on, and it is not at all clear that either the structure of the new regulatory system or the principal rules that are currently operated are in anything like a steady state. Regulatory policies are inevitably influenced by the political climate of the day, and in the UK this has changed substantially since the days of Mrs. Thatcher. Continuing change can therefore be expected over the next period.
Figure 1. British Gas: productivity growth vs output growth.
iii) Japan

# PRIVATIZATION AND DEREGULATION IN JAPAN: AN OVERVIEW

Tsuruhiko NAMBU

Faculty of Economics,

Gakushuin University

and

Economic Research Institute,

Economic Planning Agency
### I. Introduction

When Japanese government faced the problem of restructuring its economic infrastructure after the World War II, there existed several approaches to accomplish it. All the public utilities were integrated into national monopoly during the wartime and the task was how to reshape these monopolies into more efficient organization. With regard to the industries analyzed here we can classify them into three types:

1) Creation of Kosha or public corporation

2) Regulated local monopolies

3) Creation and protection of government owned company

The first approach was adopted to NTT (Nippon Telegraph and Telephone) public corporation, JNR (Japan National Railways) and Japan Monopoly Corporation (tobacco and salt).

The rationale for creating public corporations is that governmental intervention should be avoided in order that an organization with definite objective should achieve its goal. Kosha was an independent entity subject to the surveillance of the Diet but free from ministerial regulation. In this group NTT was a natural monopoly in economic sense but JNR and Japan Monopoly Corporation belonged to another species. JNR had nation wide railway network and was the greatest company in Japan in terms of the number of employees but it had to face competition from other transport modes. Private railways, highways and airlines were increasingly becoming important competitors. On the other hand, Japan Monopoly Corporation was established for the purpose of collecting tax and from economic view point very strange organization. Government could collect tax without monopoly corporation and it could have raised more tax by liberalizing the cigarette market.

The second category is represented by electric utility companies. In 1951 the prewar electricity monopoly was broken up and reorganized as nine local electricity companies. They are subject to regulation of MITI (Ministry of International Trade and Industry). The firm size is different from region to region but electric utility companies occupy politically and economically important positions in each franchise. Electric utility is an integrated body of power generation and dispatching. It was believed that there existed huge economies of scale in power generation and that was a rational for natural monopoly status.

The third category includes airline industry which started as an infant industry after the World War II. In Japan railways used to be dominant as transport mode in the domestic market and accordingly the prospect for domestic airline was not bright. The international airline market was much more uncertain and American carriers were dominant. The Ministry of Transport created government owned company, Japan Airlines.

Coming into 1970's the management and performance of public firms in general have become the target of discussion. Especially business leaders were doubtful of the bureaucratic
management of Kosha and protected government owned companies. Among these firms there seemed to exist so called X inefficiencies through the huge size and bureaucratic organization. The public felt that there was considerable waste of resources and the need for organizational reform. In 1981 the Provisional Committee on Administrative Reform was founded and investigations into public corporations started. The focus of this Committee was on NTT, JNR and Japan Monopoly Corporation but it also triggered discussion on economic efficiency of regulated firms.

By the end of 1970's Japanese public utilities have grown to giant firms in each industry. At this time the approach of intervening into market mechanism through regulatory system has become disputed in the U.S. and U.K. Deregulation was an important agenda of U.S. government which introduced full competition into domestic airline service, trucking and telecommunications even if competition was to some extent controlled at the first time. In the U.K. under the leadership of primer M. Thacher ideological support for nationalized industries collapsed and privatization became a major wave in the early 1980's. Japanese situation was similar to the U.K. in the sense that Japan had Kosha's or public corporations to be privatized as in the U.K. nationalized industries.

Deregulation in the U.S. meant lifting up the government regulation or removal of government dominance to market mechanism in the name of public interest. The focus of U.S. deregulation was to realize competition by paying attention to the market control of incumbent firms. In this process the usual regulatory constraints like entry and exit approval, the rate return and price regulation were totally removed in the case of airline and trucking industries. Asymmetric regulation was applied to AT&T by the FCC because of the market dominance of AT&T as incumbent for a long time but price cap regulation was introduced later and it was made clear that regulation is transitory towards the process of full competition.

Japan and the U.K. employed this deregulation policy when they privatized public corporations. But the policy combination of deregulation and privatization was different in each county. We will analyze the characteristics of government policy and its economic performance in the next section.

### I I. Telecommunications

The privatization of NTT public Corporation was accompanied by the introduction of the Telecommunications Business Law and the NTT Corporation Law. The Telecommunications Business Law determines the industrial structure of telecommunications industry whereas the NTT Corporation Law defines the role of NTT as a special entity. The spirit of the Business Law was to realize competition in Japanese telecommunications industry but in reality it brought in relatively strict regulation upon service providers $ ^{1} $ . By this law service providers are divided into Type I
carriers and Type II carriers. The former is a service provider which owns its telecommunication facilities whereas the latter does not own but rents them from Type I carriers. Type I carriers face MPT (Ministry of Posts and Telecommunications) regulation on many subjects and they are classified into several categories as in Table-1. The important regulation imposed by MPT can be summarized as follows:

## 1 ) Supply and Demand Balancing Clause

The number of firms which can operate in a certain category of industry is regulated by MPT considering the firm's financial viability, the threat of excess supply and further development of industry. Accordingly the number of entrants is determined by MPT and at the same time exit is not automatically possible because the minister of MPT can forbid it when he or she thinks it necessary. As a result, for example, the number of entrants in the long distance market was limited to three although new entrants enjoyed high rate of return soon after their entry.

## 2 ) Fair Rate of Return

MPT adopted the Fully Distributed Cost (FDC) method which used to be employed by the FCC and is still used now by the state public utility regulators. This method requires the calculation of separate cost by distributing the common cost into detailed services. The way of common cost distribution is arbitrary in the sense that it does not correspond to any kind of efficiency criteria. This method also invites difficulty when new service is going to be priced. There is no adequate information for cost calculation of this service because it is new. The FDC method is liable to be preventive to the development of new services.

#### I I.1. Competition in the long distance market

Three firms-DDI (Daini Denden Inc.), JT (Japan Telecom) and TWJ (Tele Way Japan)---were allowed to enter into the long distance market. They began to provide telephony service in 1987 and they succeeded to capture most profitable markets. There are several reasons: Firstly it was recognized by large users that the quality of service of new comers is not inferior to that of NTT. Secondly there existed 15-20% price differential between NTT and NCCs (New Common Carriers). (Table-2 & 3)

Thirdly NTT was not allowed to make price matching to NCCs and there was no way for NTT to recover its lost market. As a result, two of NCCs-DDI and JT--became profitable much earlier than expected. Recently the rates of NCCs have become determined by end to end formula instead of board to board. Also in 1994 access charge was at last introduced and these changes have given negative influence upon the profitability of NCCs.

In spite of the high profitability of NCCs MPT neither considered additional approval of entry into this industry nor expressed a sign when protection of three NCCs will come to an end.
a discussion of divestiture. Looking at, however, the evolutional development of competition in the local market and technological possibilities, the first task to be taken in Japan is to deregulate this industry in the spirit of the U.S. and U.K.

### I II. Air Transport

Japan has grown one of the major airline service providers in the world in the past 40 years. Air Transport industry has been regulated and protected by the Ministry of Transport. Seeing the growth of the Japanese airlines at least up to now, the industrial policy of MOT may be judged as a success. But when we look at the performance of this industry, we encounter serious problems to be solved. Prof. H. Yamauchi and H. Murakami analyzed this situation from the point of economic efficiency $ ^{2} $ . They started analysis by historical background of the air transport industry.

In 1952, Japan Airlines was established as a major private company and started service in the domestic market. Next year, Japan was allowed operating international air transport service, and the government decided to reform JAL to half public corporation. The purpose of this reform was to foster the company as a national flag carrier. Around that time, several private airline companies were founded in 1957 and the bigger two of these carriers merged to form All Nippon Airways. After that, remaining companies were also undergone the integration and consolidation, and in the mid-1960s, there existed four airline companies in Japan, that is JAL, ANA, Japan Domestic Airlines (JDA) and Toa Airways (TA). In the second half of 1960s, TA developed co-operative arrangement with ANA, while JDA with JAL. As a result, it was assumed that they would be consolidated into the big two, JAL and ANA.

However, the government policy changed its course due to the Cabinet Meeting Resolution “Concerning Airline Operations” of November 1970 and the Notice from the Minister of Transport in July 1972. The Cabinet Meeting Resolution of 1970 specified not a two-company system, but rather a three-company system resulting from the consolidation of JDA and TA. According to this decision and notification, generally referred to as the “Aviation Constitution,” Japan Airlines would be responsible for international routes and domestic trunk routes; ANA would be responsible for domestic trunk routes, local routes and short-distance international charter flights; and Toa Domestic Airlines, which was the new company resulting from the consolidation of JDA and TA, would be responsible for local routes and a portion of domestic trunk routes. Thus, the so-called 1970-1972 airline regulation system (the old regime, hereafter) was established.

The old regime could survive until 1980's when new era for air transport service was initiated. Already in 1970's the U.S. airline policy met a drastic change and the rest of the world had to respond to it. Japan was no exception and in 1986 the Ministry of Transport replaced its old
the face of high rate of inflation. Politicians intended to suppress inflation by refusing rate revision of public corporations arguing that the rise of public prices would hit the life of general public must seriously. The deficit of JNR was institutionalized in this way and it accelerated the organizational problem of JNR.

The Ministry of Transport revised the Road Transport Law in 1953 and got the hold of this industry. At first MOT was going to coordinate the role of railways and trucking but the decline of railways was almost exogenously determined. MOT took different approach to passenger and freight transport: as for the latter regulation used to be more relaxed than the former. Tariffs were based on the band and illegal entry was permitted with anticipated penalty on entrants. But the Road Transport Law include supply-demand balancing clause in the spirit that regulator can foresee and get rid of the gap between demand and supply. In practice this regulation was not binding and constituted no constraints to new comers.

In short before Motor Truck Business Law came out in 1990, the trucking industry was workably competitive and new law only reconfirmed the situation. With the introduction of newly enacted law, the old supply demand balancing clause was removed although policy measure to watch excessive supply was retained. Professor H. Yamauchi analyzed the effect of motor Trucking Business Law upon market structure, fare and employment $ ^{3} $ .

The change of market structure seems small although the growth of aerial carriers was witnessed since 1991. One notable change is that the size of special consolidate carriers has been increasing. The trend of fare has not been changed by the new law. There exists continued moderate upward trend (Figure-3). The effect upon employment cannot be traced exactly because of the lack of data. Summing up, the deregulatory policy in 1990 has not produced remarkable change simply because the trucking industry has already been competitive even if there may have existed anti-competitive problems.

Lastly we will pick up the case of door to door trucking service which can illustrate the regulatory response to new business. In 1976 Yamato Transport Company introduced door to door delivery service. Yamato faced MOT reluctance to admit this business because it might give unfavorable influence on other transport operators. MOT was slow to approve the first fare application and prolonged the examination process for application to expand delivery network. Yamato had to fight in the court to avoid regulatory delay. In spite of the turmoil for network expansion, door to door delivery service grew rapidly and has become quite popular (Figure-4).

### V. Electric Utilities

#### V. 1. Institutional framework

When we compare electric utility industry with other regulated industries -