Franchising and Privatization
Increasing private sector participation to improve the efficiency of infrastructure services is a growing trend around the world. Some elements of most infrastructure activities exhibit "natural monopoly" characteristics, meaning that one...
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| Format: | Viewpoint |
| Language: | English |
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World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/1995/03/697564/franchising-privatization http://hdl.handle.net/10986/11677 |
| Summary: | Increasing private sector participation
to improve the efficiency of infrastructure services is a
growing trend around the world. Some elements of most
infrastructure activities exhibit "natural
monopoly" characteristics, meaning that one or more
services or products can be produced most cheaply by a
single firm. This raises the issues of organizing an
infrastructure industry so as to gain the advantages of
production by a single firm, without encouraging
monopolistic conduct. This Note discusses a franchise
approach to problems of natural monopoly--franchise bidding
schemes--proposed by Sir Edwin Chadwick, a Victorian social
reformer and later promoted by Harold Demsetz in the United
States. The essential idea is that monopoly franchises could
be auctioned off to the bidder offering the most attractive
terms. Competition through bidding ensures minimum selling
prices because the winning franchise will lower prices until
revenues just cover costs. Franchise schemes also may avoid
pitfalls associated with traditional regulation of such
industries or with their nationalization. The Note also
discusses the advantages of a franchise system and the
importance of contract design to a successful franchise system. |
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