Privatization can be an important component of a pro-competitive approach to producing social benefits.  Privatization, if done well, does not attach any special political responsibilities to the privatized company.  By ensuring that an enterprise is run on a commercial basis, privatization removes political obstacles to promoting competition.  Experience shows that competition generally brings significant benefits to consumers in the form of lower prices, better quality products or services, more choices, and a higher rate of innovation.  Moreover, if the form of competition that evolves fails to produce some socially desirable outcome, governments can choose to take explicit, competitively neutral actions to address the shortcoming.  For instance, government subsidies might be provided to particular groups of consumers to address particular social goals.   More generally, re-regulation is always an implicit political risk in an industry that has undergone privatization and liberalization.  Companies can manage this risk by ensuring that customers receive and recognize clear benefits from a private, competitive industry.

The relationship between the privatization of Kenya Airways and benefits to Kenyan consumers is still developing.  The turnaround of Kenya Airways in preparation for privatization brought noted improvements in quality of service.  Moreover, the privatization established a strategic investor with significant control rights and protection from government appropriation under the Kenyan Foreign Investment Protection Act.  Privatization also reduced the government's ownership share of Kenyan Airways to 23%.   Thus privatization has ensured that Kenya Airways will be operated consistently on commercial terms.  In doing so privatization has enabled a focus on customer needs and has lessened the political obstacles to the further development of competition.   However, Kenya Airways received as part of its privatization government guarantees that will hinder the development of additional competition in the medium term.  In particular, the government committed:

• That Kenyan Airways will remain the designated national airline and flag carrier;
• That it will maintain Kenya Airways' single carrier status under existing and future bi-lateral agreements for a period of at least five years;
• That it will not withdraw Kenya Airways' existing route licenses;
• That it will continue its policy of not permitting charter flights to and from Jomo Kenyatta International Airport (JKIA) for a period of at least five years.

International comparisons provide some indication of the competitiveness of the Kenyan air transport market.  The table below compares round-trip low unrestricted fares from Nairobi to London, 23 January 1998 to 31 January 1998, with similar round trips from neighboring African countries.  The table suggests that Kenyan travelers face somewhat higher fares than Ugandan and Ethiopian travelers, but lower fares than travelers from Tanzania.  Other fare quotes can be obtained on-line for similar illustrative comparisons.  A representative survey of fares is needed for a thorough, statistically significant analysis.
 

1. Which is worse, a publicly owned monopoly or a privately owned monopoly?

 
2. To what extent will a profit-maximizing monopolist past along cost reductions into its prices?

 
3. A temporary priviledged position for a privatized firm ("convalescent patient") might be justified on grounds similar to the traditional "infant industry" argument.  What are relevant considerations in the "infant industry" debate and how might they relate to privatization?