David Flacher¹ & Hugues Jennequin¹, ² ¹ : Paris 13 University CEPN – CNRS UMR 7115 ² : Rouen University- CARE Liberalization and Universal service: Progess or decline EAEPE and PRESOM Seminar Paris, November, 23, 2007

Introduction Since the 1980’s Public monopoly are called into question Primarily the one concerning “industrial and commercial” sectors Also the related public services “failures” The main reasons Technical and economical aspects Lower fixed costs (  Competition becomes possible) Inefficiency of public firms Productivity Services do not match with consumers’ desires Building the European market  The State is not anymore kind, omniscient and infallible

Introduction Main stakes involved in the changes concerning public services Basis of the European “social model” Made of social cohesion (strong public services) Made of regional planning Characteristics of the public services Discriminations… Involvement of citizen and authorities in their definition Its implementation

Introduction “Services of general interest” Only recognized by the European level in (1997 : Amsterdam treaty) What does this notion imply? Possible restriction to competition in order to accomplish the missions of general interest Possibility for the States to go beyond European obligations But still unclear at a juridical level and difficult to apply

Introduction Particularly for “industrial and commercial” services, EC asked for clarification concerning The perimeter of SGI Their costs The way in which they are priced Their funding Their assesment How do they operate… ?

Introduction However No evidence for better efficiency of private firms concerning Quality of service Supply widening Price decrease… Conversely No evidence that public monopolies are still lawful to protect the general interest.

Introduction The question is then What is the relevant level of public intervention in the economy in order to guarantee the general interest? Content of this article Definitions (public and universal service) Universal service compatible with “economic efficiency”? Universal service: Progress or decline of public service?

Definitions The notion of “public service” in France 1873 in case law (jurisprudence) Duguit (1928) Activities concerning “general interest” that the market is not able to provide entirely But no precise definition of “general interest”  depends on the government Legal definition through “principle-attributes” Equal treatment among users Continuity of public services (in French constitution since 1979) Adaptability (to techniques and needs evolution) Two types of public services The one pertaining to royal prerogatives The others (education, social services, “industrial and commercial” services like the ones of network industries

Definitions However, the notion of “public service” is a fuzzy one Service provided for the public Service of general interest Public ownership of the firm Europe preferred the notion of SGI: (Economic) service of general interest Merchant or not merchant service Specific obligations asked by public authorities to providers in order to fulfill aims of public interest

Definitions Universal service 1987 : in the Green book on telecoms liberalization Dimension of SGI Definition of common services obligations for the whole EU Basic access for everybody to a minimum set of services at an affordable price Geographical dimension (non profitable area must be covered) Social dimension (affordable prices) Should be consistent with the market

Public services and economic efficiency One of the main aim of liberalization Efficiency Productive efficiency Allocative efficiency Dynamic efficiency However, no clear evidence that the aim is reached What about public services? Distributive efficiency is compatible with competition… … only if it does not introduce distortion How to realize those conditions? Competition for the field (Demsetz, 1968) Ex ante regulation in order to benefit from competition

Universal service: progress or decline of public services? Before universal service : public monopoly Aiming at satisfying users Independent from profitability constraints Protected by law (possible cross-subsidies) Services financing infrastructures High density area financing low density ones  An imprecise definition of universal services was possible With the introduction of competition Cross-subsidies become impossible The aim of the firms is changing  The definition, the cost, the funding of universal services and the operator(s) providing these services must be established

Public services and economic efficiency “Progress” Clarification of Definition Cost, funding… and thus the possibility of debating public choices One aim Defining precisely universal services enables to limit the competition distortion and the eventual public subsidies

Public services and economic efficiency Universal service in telecom Fixed telephony Telephone director Public phones Social tariffs Public service in the telecom service in France Universal service + Obligatory services (but with free pricing) + National security, R&D, education

Public services and economic efficiency Universal service in electricity Home provision of electricity at affordable, transparent and comparable prices Public service in the telecom service in EU Universal service + Protection of vulnerable or geographically isolated consumers + Environmental concerns + Continuity of provision

Public services and economic efficiency Once clarified the costs of US and their possible reductions to competition… Funding the US: 3 possibilities Self-funding Competition for the field (auctions, franchise bidding)  attribution to the operator that asks the lower subsidies Distribution of the costs on all the operators Privatization In order to avoid conflicts between the State shareholder and the State regulator

Public services and economic efficiency Decline of public services? US should be a dynamic concept However, no (or little) evolution of the US boundaries (in the telecom field, for instance). 3 dangerous aspects due to The limits of competition itself (market failures) QoS, regional planning or investment does not seem so good in telecom sector Regulated price replaced by market ones in electricity sector  “higher prices in order to reach competition”… Transaction costs in organizing competition… US is only one dimension of public services US boundaries could remain unchanged

Public services and economic efficiency This is the case in telecom sector Mobile and Broadband Internet have not been integrated to universal service State and mainly regional decisions concerning the extension of high speed local loop  possible inequalities between regions

Public services and economic efficiency Industrial policies could be more efficient than effective competition policies With industrial policies Public services are defined imprecisely but globally, including the last technical progresses… With competition and the related introduction of US The extension of US is not guaranteed, in particular to avoid market distortion All the aspects of the sector are more isolated the one from each other, limiting integrated view of US

Conclusion Public services, in liberalized markets, needed a clarification on The services considered as of general interest The costs of these services The funding The choice of the operators providing the services The levels of responsibilities between EU, member States… But the border between free competition and general interest is unclear and defenders of public services as the basis of the social model should be kept in mind that US is a narrow vision of public services (and that US could be extended to other services: education, social and health services…) Effective competition policies cold be counterproductive if market failures are too important US must really be a dynamic concept (and must thus integrate technical and social evolution in order to adapt its perimeter)