Why Foreign Investors Get a Bad Name
I am vacationing in Bulgaria and had a first-hand experience in how foreign investors get a bad name. Half-way through my second day in Aprilzi, a mountainous town in central Bulgaria, the electricity went off. I called the electricity company, to report the problem. "Not a problem," the company representative said, "we disconnected you."
The rest of the conversation is not fit for posting. The gist is that the electricity distribution in this region was recently acquired by CEZ, a Czech company. The company instituted a free replacement of all electricity meters--with one catch. If you don't take up the offer, you get disconnected. You get connected after you paid a fine - but with a 3 day delay!
After some frantic calling and pulling decades-old strings, I was told that if I drove super fast and caught a particular official just about to leave, some small money would do the trick. So I did.
The office of the official, call him the electricity gatekeeper, was full with 8 other just-disconnected people. They all were cursing CEZ and all foreign owners. "This never happened before these expletive expletive came in." I started defending the Czech investors, to no avail. The fellow disconnected simply disregarded me.
And then it struck me: this truly never happened before. The state electricity company never disconnected anyone. It was inefficient, but friendly. The Czechs are very efficient, including at disconnecting.
Most people seem to prefer the former.
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Simeon- - I think in a broader sense, private corporations tend to overemphasize efficiency at the expense of equity. Translate this as: disregard political economy, it's all about profit. Believe you me, if this goes on for far too long, it will have a serious backlash for the government.
One can also speculate that communicating the Czech company's takeover of the electricity company, changes in services and how it will all affect people was poorly managed.
Posted by: Daniel Amponsah | Jun 30, 2008 10:51:32 AM
Daniel:
I agree it is all about the. It should be like that anyway. The issue is when a profit-making entity replaces a social entity (a state-owned electricity distributor). The shock is often too big.
What CEZ doesn't seem to have taken into account is that other services are failing. For example, they allegedly sent notice sthrough the post. But postal services in Bulgaria are not reliable in small towns and villages. Hence the notices may not get delivered. Which infuriates customers to no end: imagine showing up at home and finding you have no electricity.
Posted by: Simeon Djankov | Jul 10, 2008 1:38:30 AM
Most utility companies are natural monoplies, whether in Bulgaria, France or US. As such, in any normal country, these monoplies while still private companies are subject to special regulations, such as they cannot raise prices or charge for extra services without approval, they have to provide certain level of services and can disconnect custommers under agreed conditions or they can be fined. The reason is that we all need electicity and also cannot defect to a competitor, since competition is not feasible due to fixed costs of laying electricity lines being too large.
Theoretically, no monopoly is efficient, since it incurs deadweight loss /Econ 101/, though it may be more efficient than a state enterprise. This is the most basic concept in Econ.
This is why, Dominion Power in Northern Virginia does not charge prices with 500% markup, though they would love to, and does not disconnect people based on some random decision of new meters. If these kinds of tactics happened in the US, Canada or Western Europe, I can guarantee you, they will get sued or at least fined and customers refunded.
When I was a Ph.D. student in Economics, I remember that my local phone company in Chicago, Ameritech at that the time was overcharging for some "capital improvement" stuff, better lines or whatever, similar to CEZ "new meters". They decided it is OK to charge some extra fee without asking for permission from the Illinois Commerce Commission. They got slapped with a nice half a billion dollar class action lawsuit, and I got refunded $100, when they won. Since then, I have not seen "capital improvement" fee on my bill.
Please, find me in the US and Canada, a state a province, a federal territory, a county or a town, where this kind of corrupt monopoly behavior goes unregulated, people getting cut-off in the middle of winter, or inflated bills, or prices marked up 500% over cost.
The unregulated monoplies /or the corruption which allows them to go unregulated/ which occurred in Bulgaria is what people hate, not weather foreigner owns it or not. The same goes for electricity, water, heating /parno/ etc. Next title for your "Doing Business Survey" for Bulgaria should be called "Doing Monopoly in Bulgaria".
Sincerely,
Posted by: D. M. | Jul 21, 2008 3:46:49 PM
D.M.- You are perfectly right, utilities companies tend to be natural monopolies, but thanks to proper regulations they are made to balance "economic efficiency" with social efficiency in the U.S., if you will.
However, for lack of proper regulatory and legally enforceable frameworks in most of the Bank Group's client countries, such natural monopolies are always having a field day.
Another difference is: from the get-go utility companies have always been private corporations rather than government entities in Canada, the U.S. and others. So, governments have concentrated on ensuring that citizens are not short-changed. Contrast this with governments in most developing countries going a begging so "a strategic investor" will bail them from having to keep a white elephant afloat financially. This usually leads to the loss of political muscle to ensure proper behavior.
As Simeon stated in responding to my previous post, this is about systems of an organic nature. Changes in an area will certainly cause a system wide stir. This is why I would want to believe that Bank Group's advice regarding privatization should a embody rigor and sophistication equal to the complexity and sensitivity of the task. Are there working regulatory frameworks? How about the courts to decide on the class action suit to which you alluded? The list goes on.
PS: Simeon, congratulations for your new position as chief economist. I wish you the best of luck.
Posted by: Daniel Amponsah | Jul 25, 2008 1:50:51 PM