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How to Deepen the Reform of the Monopoly Industries in China

Feb 11,2005

Liu Shijin, Development Research Center of the State Council

Research Report No.199, 2004

I. The Particularity and Urgency of the Reform of the Monopoly Industries in China

Since 1980s, the reform of the monopoly industries has become an international trend, which is in the direction of relaxing control and introducing competition into such fields as may allow of competitions. The monopoly industries mentioned here in the specific situation of China refer to those industries which have certain characteristics of natural monopoly and at the same time also have very distinctive features of administrative monopoly; such industries primarily take the form of large-scale wholly State-owned or proprietary administrative companies (or competent authorities), mainly including electric power, telecommunications, railway, civil aviation, natural gas and cable television industries. By the reform of the monopoly industries, I mean to build a new framework which takes the enterprises in a market economy environment as the basis and introduces necessary competition subjected to rational control. As far as the reform of China’s monopoly industries is concerned, it is evident that relaxing control is far from enough; to put it correctly, what is of top priority is not the matter of control, but the fundamental structure of business units and their operation modes. There does not exist a reasonable basis for control before these problems are settled in essence.

The necessity of the reform of monopoly industries is, in the first place, derived from the internal logic of market economy. As a component part of national economy, a part which provides infrastructure and holds an extraordinarily important position in economic operation, if such industries are dissociated from the market economy, the market economy will definitely be incomplete, abnormal and incapable of operation with high efficiency. In a sense, it can only be called a "semi-market economy". Viewed from the practical experience of China’s economic reform, the reform of the State-owned enterprises in the monopoly industries has the latest start with the highest degree of difficulty and a great many controversies. It is obvious that if the reform of the State-owned enterprises in the monopoly industries is not put into effect, the objectives of strategic restructuring of national economy and the transformation of State-owned industries can never be achieved.

In reality, the pressure on the reform of the monopoly industries mostly comes from the "bottlenecks" in economic growth and people’s dissatisfaction with the low efficiency and corruption of the monopoly industries. Over the past twenty-odd years of reform and opening-up, "bottlenecks" have appeared regularly in the course of economic growth. Every time after macroeconomy has undergone a period of rapid growth, the "bottleneck" constraints take place in such basic industries as energy resources, raw materials, traffic, etc. and infrastructure. The new round of economic growth beginning from 2002 witnessed the price booms of raw materials such as steel products and non-ferrous metals, the overall tension in the coal, electric power, oil and traffic industries, and the severe imbalance in the industrial structure. Although such situations may be attributed partly to some technical reasons, such as enormous demand and long cycle of investment in basic industries and infrastructure, they are largely due to the irrational managerial system. On the one hand, State-owned enterprises in such industries cannot make active and proper responses to the demands, which can be clearly seen in comparison with the quick responses made by non-State-owned enterprises in other industries to the market; on the other hand, since these industries are, to a relatively great extent, subject to administrative monopoly, it is difficult for outside investors who are able to make active responses to enter these industries. Therefore, when short of supply gives rise to severe "bottlenecks", it is just the time such problems as low efficiency and corruption are most eminent, and consequently, the general public’s dissatisfaction and grievance also increase. A most recent example is the numerous problems arising from around "railway wagons" when railway coal transportation becomes extremely busy.

When it is suggested to "eliminate the unsteady and unhealthy factors in the course of economic growth by deepening the reform", the monopoly industries are actually the first to bear the brunt. If the inherent demand of the development of a market economy provides the"justification"for reform, then the increasing pressure in reality constitutes the "urgency" of reform. However, although these two conditions do exist, the reform of the monopoly industries is still confronted with many obstacles, or in other words, it is still very difficult to achieve the anticipated objectives. This requires an in-depth analysis of the features of the reform of China’s monopoly industries at the present stage.

II. Problems at Existing Four Levels of Reform

The problems in the reform of the monopoly industries can be divided into four levels in principle:

1.The choice of operation mode

The keystone is to break down the administrative monopoly, introduce competition into such links as may allow of competition, and establish a stable connection between natural monopoly and competition, so as to improve the effect of stimulation and at the same time reduce transaction cost. Under normal conditions, by"breaking down the monopoly", we actually mean to break down administrative monopoly, but not natural monopoly. As is elaborated by economists, establishing more than one enterprise where natural monopoly indeed exists will increase the cost. The main problem in reality is that monopoly operation is conducted where there does not exist natural monopoly, and moreover, it belongs to administrative monopoly. To distinguishbetween natural and administrative monopolies is not a simple theoretical or technical matter, and natural monopoly is often used as an excuse for exercising administrative monopoly. Along with technical advancement and the improvement of the means of control, what was taken as the field of natural monopoly before is undergoing a change in nature and becoming competitive to some extent. For example, the replacement of traditional copper phone lines by optical fiber lines offers a technical platform for numerous operators to provide competitive services. For another example, through operating concessions auction, although a project of natural monopoly is undertaken by only one enterprise, its access was gained by means of competition, and there are potential competitors just outside the"entrance", which renders the project"competitive".

Rationally defining the boundary between natural monopoly and competitiveness is just one necessary step, and whether or not a smooth transition or "seamless joint"between the two can be secured is the key point in designing the governance structure of the operation mode. There exists a choice as to where the "interface"is and how to make the connection, for example, between road net facilities and passenger/freight train operations in the railway industry; between power generation, distribution and transmission in the electric power industry; between telecommunication, cable television network and operation business; and in general, between basic network and network operations. From the economic point of view on transaction cost, when making the choice we should give a comprehensive consideration to such factors as specialization of asset, transaction frequency and uncertainty, and make arrangement for a governance structure with relatively low transaction cost. For example, in the railway industry, with regard to certain road net facilities, operators who frequently use them and those who only use them at long intervals have very different governance structures between themselves and the road net operators, the former need to form a vertical integrated structure, while the latter only need to sign a temporary agreement.

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