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Saturday, September 23, 2006

Fisking Anon on the "P" Word

Anon put a lot of effort into this comment a few days ago. I thought the least I could do would be to attempt a good fisking.

Anon Privatisation is the sale of a state owned asset to the private sector. In New Zealand, privatisation was done by the Labour government in the 80s and the National government in the 90s. The reasons politicians gave for privatisation were to improve efficiency and pay off government debt with the sales revenue. These reasons were very weak.

New Zeal Privatisation can also be returning shares in public corporations to those who own them ie the taxpayer. This is the line that ACT is now taking re any future privatisations. In the '80s, corporations were sold for quick cash at least partly to ease the government's financial problems. This was understandable at the time, but has left a sour taste for many. The perception, right or wrong as it may be, that the "family silver" was flogged off at rock bottom prices has done huge harm to the concept of privatisation. I think the best way the "P" word can now be sold, is by giving shares directly to the public to do with as they will.

Anon Privatisation didn't make the assets more efficient; corporatisation did. Corporatisation is when a state entity is converted into a state owned enterprise (SOE) which has a business structure, profit maximisation mandate and a CEO on performance based pay just like a private company would. Corporatisation is a prerequisite for privatisation.

New Zeal Probably true, but corporatisation is only necessary to correct a problem that should't exist in the first place-state ownership of productive assets. I am OK with corporatisation if it is a stepping stone to privatisation, but not as an end in itself. Permanent SOEs are in my opinion, the worst of all options. They combine the power of the state, the "greed" of the profit motive and the lack of accountability endemic in the public sector.

The electricity industry is a classic example of this. The ideal for me would be to put all electricity generation in private hands. Failing that, I would like to see any remaining state electricity generation run along "public service" lines. This current halfway house gives private enterprise a bad name, rips off the consumer and can't even provide certainty of supply. A bloody disaster all round.

Anon After being corporatised, most of the SOEs generated high rates of return. In an attempt to lower public debt, the government sold many SOEs for well below their true value, mostly to foreign investors. The overall rates of return for the SOEs were much higher than the interest rates on the government debt. It would have been more economical for the government to have held on to the assets and pay the debt off more slowly, rather than privatise them.

New Zeal From the point of view of medium term government finances you're probably quite right. However, on the broader plane I think the reforms of the '80s have done this country tremendous economic good. Their effects have rippled through every sector of the economy and made NZ business much leaner and more efficient. Had we had the luxury of turning the SOEs over to the people, I think we'd be even better off and privatisation would have gone much further and been better accepted.

Anon For an investor to want to buy a privatised asset, the asset's expected rate of return would have to be significantly higher than the interest rate on savings. For a rational government to want to privatise an asset, the asset's expected rate of return should be less than the interest rate charged on government debt. There is a very narrow margin for privatisation to be economically viable.

New Zeal In the short term you are right. If you look long term and are a revolutionary like me, the picture changes. SOEs can make big money for governments and it often seems silly to let them go. However, would those assets be even more productive in the long term, in private hands? I think yes. For a start private owners would make economic decisions, not political ones. In the long run, private, diversified and competitive ownership is always a better bet than politically controlled monopolies.

Anon A short to mid term side effect of corporatisation was high unemployment. In order to maximise profit, SOEs needed to lay off unnecessary workers. This freed up labour for more important functions in the economy but it took many years for the unemployment rate to drop back to low levels.

New Zeal That is true. Perhaps any future privatisations should be done more piecemeal and over a slightly longer term. Given today's far more sound and buoyant economy though, I think any negative employment effects would be negligible and temporary.

Anon The biggest problem with the privatisations by NZ governments is the effect it has had on the current account deficit. The current account balance is essentially the difference between the amounts of money flowing into and out of the country. As a result of the privatisations, New Zealand's current account remains a deficit even today, mostly because of the huge amount of profit flowing out of the country. A lack of asset ownership by New Zealanders is the main reason why NZ slipped so far down the OECD rankings in terms of per capita income. An increase in productivity usually means profits will rise but it hardly ever means workers' wages will. An adequate level of asset ownership by locals is necessary for the local economy to grow at a significant rate.

New Zeal To be honest, I don't understand your reasoning here. Even if this were a problem, it would be solved by giving shares directly to taxpayers. The wealth would remain largely in the country and would help finance building and business investment, education and asset acquirement. Some would go on holidays, flash cars, women, alcohol and gambling. Some might even be wasted. Surely however, giving people spending choices is the main point of productive activity.

Anon There are good reasons for governments to create SOEs. If a nation has a small population, there might not be anyone living there that has the courage, capital and initiative to start large scale ventures such as airlines and power plants. Governments can borrow large amounts of money at interest rates lower than what households and firms can borrow for. By investing in SOEs, the government spreads the risk very thinly across the whole population rather than having the risk concentrated within a small group of wealthy shareholders which is likely to happen in the private sector.

New Zeal I agree that this is the perception, but I don't believe it is the reality. NZ governments, from Vogel's time to now, have invested in huge infrastructure projects that have done this country great good. Stalin and Mao did much the same in their respective countries. However private interests built the US railway system and countless other huge projects. I believe that private interests would have built everything we have now and probably much more besides had the government (A)not stood in their way or (B) not beating them to it.

What's wrong with letting wealthy shareholders take the risks? Surely most of them are wealthy because they are smart. People are usually more prudent and farsighted spending their own hard earned dosh than they are spending anonymous taxpayers money.

Anon It has been said that if SOEs get into financial strife, the government would bail them out. Air NZ was an SOE that got privatised. While privately owned, it got bailed out by the government by renationalising around 80% of it. Whether or not a private company or SOE gets bailed out by the government has more to do with its importance to the economy. SOEs tend to play important roles in the economy. Air NZ is relied upon by the tourism industry and some exporters.

New Zeal Of course governments will bail out SOEs if they have to. That is a very powerful arguement against having SOEs. No business should ever be bailed out by the taxpayer. It might seem to makeeconomic sense in the short term, but it weakens the over all economy by creating the perception that the state plays favourites and will bail you out if you can lobby effectively enough.

What is better, having 20 or 30 private airlines in NZ, or one dominant state owned carrier? Which puts our tourist trade more at risk? Economic diversification and de-centralisation is far less risky to the economy as a whole that putting most of your eggs in one state owned basket.

4 Comments:

Anonymous spam said...

So...

General agreement that Paula Rebstock's price controls will kill the energy sector then?

2:50 PM  
Blogger Trevor Loudon said...

The sector seems to be in a very bad way re investment in infrastructure.

I can't see how price controls could do anything but make the situation even worse

5:48 PM  
Anonymous Anonymous said...

"What is better, having 20 or 30 private airlines in NZ, or one dominant state owned carrier? Which puts our tourist trade more at risk?"

20 airlines would be far too many for a country the size of NZ. If there was a situation with 20 airlines in the free market, most would go bankrupt.

Air NZ is state owned but isn't a monopoly.

With large scale service providers, less competition can sometimes mean more price discrimination (in favour of low income groups) as well as economies of scale. More competition in such an industry could potentially raise prices and lower welfare.

Having a locally owned airline, increases the fraction of tourist spending money staying in NZ.

8:09 PM  
Anonymous Anonymous said...

Permanent SOEs are in my opinion, the worst of all options. They combine the power of the state, the "greed" of the profit motive and the lack of accountability endemic in the public sector.

The SOE's CEO on performance based pay would have the profit motive while the government would be motivated by votes. Why would SOE's be less accountable than their private sector counterparts?

8:23 PM  

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