The Evolving Bargain: Strategic Implications of Deregulation and Privatization. - Review - book review

Business Economics, Oct, 2000 by Gerald L. Musgrave

By Willis Emmons, Boston, MA: Harvard Business School Press, 2000, 320 pp., $35.00 hardcover.

The Evolving Bargain is a book about business competition. The competition is not between firms, although there is a section about it. The competition is between the firm, the state, and all of the stakeholders that influence the outcome of deregulation and privatization.

Business economists often find it a challenge to communicate the practical uses of economics with managers and especially top management in the day-to-day operation of the organization. This book goes a long way in bridging some of that gap. It is not a cookbook that says here is what elasticity means in a practical sense, but when it discusses the necessity of "rebalancing" relative prices in accordance with market conditions, it is all there. Prior to deregulation or privatization the author notes that "enterprises often stress price uniformity, even in the presence of substantial differences in the cost of service or price sensitivity." In the chapter on transforming business operations, he notes, "the worldwide tendency of market reforms is (1) to abandon customers who are unwilling to pay the marginal cost, (2) charging higher margins to customers who place higher value on the product or who have fewer competitive alternatives, and (3) charging lower margins but increasing sales volume to customers who place a higher value on the product or enjoy greater competitive alternatives." It is almost like the beginning of an MBA lecture on converting elasticity measures to useful international business strategy.

The author has experience with MBAs. He has been a faculty member of the Harvard Business School for over a decade. However, the book is not a textbook; and it never talks down to the reader. The book is actually many interwoven case studies linking the author's insightful view of the results and strategic imperatives generated by deregulation and privatization worldwide. It is based on the author's experience and interviews of 150 industry executives, government officials, and investors. The detailed examples are from North and South America, Europe, and Asia. While it is not a textbook, it would be a valuable addition to a business-oriented microeconomics or international business class, in conjunction with the traditional economics material.

The book is nontraditional in the sense that business decisions concerning the enterprise, its competitors, suppliers and customers, are not its focus. The focus is the relation between the enterprise, competitors, suppliers, customers, other stakeholders, and the state. These relations are called the "bargain." In introducing the term "bargain", the author provides a vivid example using, "the agreement in the early 1990s where the State of Alabama agreed to provide tax breaks and infrastructure services, valued at $200 million. In return, Mercedes-Benz agreed to build a manufacturing plant with a capacity of 60,000 vehicles, employing 1,000 people." While this bargain was not in the context of deregulation or privatization, it sets the stage for numerous and more complex examples that are. Some of the "bargains" are seen to be explicit and in the form of written contracts; others are implicit and in the form of expected outcomes of the enterprisestate interrelation.

Several of the cases, although presented at a professional level, read with the excitement of a novel. In May 1991, the elections in India brought together a powerful coalition of parties having a goal of "Liberalized Economic Policy." In this context it meant that in early 1992 there could be a reform "bargain" where for the first time one hundred percent foreign ownership of electric power plants would be allowed. Enron Development Corporation, a US subsidiary of Enron Corporation, having considerable experience in other projects in Argentina, China, Guatemala, and the Philippines, organized the deal. In December 1993, a $2.85 billion agreement was signed between the Maharastra State Electric Board and the Dabhol Power Corporation (DPC). The corporation was a joint venture between Enron, General Electric, and Bechtel. The lenders were the U.S. Export-Import Bank, the Oversees Private Investment Corporation, the Industrial Development Bank, and the Bank of America. The project seemed to go smoothly and DPC negotiated a successful agreement on the project's rate of return. That is, it ran smoothly until the Congress Party was voted out of office. The new regime of the Shiv Sena and Bharatiya Janta Party (SS-BJP) had been opponents of the project. Soon after, the SS-BJP unilaterally canceled the project. DPC responded swiftly to the cancellation by initiating international arbitration proceedings, per the contract. The SS-BJP government countered with a suit in Bombay challenging the right to international arbitration, which was struck down by India's Supreme Court. In the end, DPC won the right to continue with the project but made important concessions on electricity rates. The author uses the details of the story to explain the lessons he has to teach. This one concentrates on the advantages of powerful partners, explicit contract terms, and harnessing a range of stakeholders in the process.