Make, Buy, or Some of Both? The Case of Russian Railways

Abstract

There is a growing consensus among economists that the most procompetitive strategy for restructuring public utility enterprises includes complete vertical separation of the network or grid portion of a sector from other parts of the sector where competition is to be created. Although exceptions to this rule are readily granted, it is generally considered that any alternative strategy may pay a high cost in terms of discriminatory access to the grid by non-integrated entrants into the new competitive sector. This consensus is somewhat surprising in light of the simultaneous growth of transactions cost economics, with its emphasis on the benefits of close vertical relationships - including vertical integration - in the face of complexity, unforeseeable contingencies, and problems with contract law enforcement. These issues are considered in the context of a Russian railways restructuring plan which may - or may not - involve complete vertical separation.

Keywords: public utilities, restructuring, vertical separation, transactions cost economics, contract law enforcement, railways, Russia

JEL Classification: D23, L14, L22, L43, L51, L90, L92, N74