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4 November 2005 Privatisation: A Third Rail? Privatisation seems to be regarded
as a 'third rail' in New Zealand politics: touch it and you're dead. Going into the last election, no
parties argued strongly that the government should get out of running
businesses. Even the ACT Party was quiet on the subject. United
Future proposed the sale of minority (40%) stakes in most SOEs and
National's main commitments were to sell some Landcorp farms and
a minority stake in Solid Energy. This is curious. Most New Zealand
privatisations were successful, in the sense of adding value to
the economy, reducing prices and improving services to consumers,
and increasing the profitability of enterprises. Around the world, governments are
continuing to transfer state enterprises to the private sector.
Australia has been engaged in large-scale privatisation and the
federal government is currently selling its remaining stake in Telstra.
The Japanese government has just
won an election on its plans to privatise its postal system. Nevertheless, privatisation has
not been a popular policy in many countries. Polling suggests that
70% of Australians do not favour the Telstra sale. Yet it seems that opposition is
not intense, in the sense of having a strong influence on voting
decisions. Internationally, there have been relatively few cases
of renationalisation, even though buying back former state businesses
is entirely feasible. Public acceptance seems to occur
after the fact. How many people today want the government to buy
back NZ Steel or State Insurance? Ownership matters. A raft of studies
over the last 20 years has established that, on average and over
time, the performance of privately owned businesses is superior
to state-owned ones. This does not mean that all private
businesses are success stories and all SOEs are failures. What matters
for public policy is the general pattern, and governments should
not bet against the odds with taxpayers' money. Why then does privatisation seem
like a 'third rail' in New Zealand? After all, it is not hard to
convince people that politicians usually do a poor job of running
businesses (think TVNZ), compared with investors with their own
money at stake. Part of the answer may be New Zealand's
atavistic attachment to socialistic policies - in this case "public
ownership of the means of production, distribution and exchange". Another part may be the failure
of politicians to defend the record and dispel myths. Where arguments
have been well presented, voters have been prepared to accept them:
the sale of Powerco shares by the New Plymouth City Council is a
recent case in point. Three years ago the Business Roundtable
published a study addressing criticisms of New Zealand privatisations
- assets were sold too cheaply, the benefits went to foreign investors,
the requirement to make profits pushed up prices, and so on. Most
were shown to be unfounded. Critics commonly cite Tranz Rail
and Air New Zealand as 'failures' of privatisation. Even if true,
these charges would not weaken the overall case, but both are disputable. Tranz Rail at least created more
economic value than when it was government-owned; taxpayers no longer
had to bail the company out at regular intervals; and there was
no need for the government to get involved again - with potential
future liabilities. The immediate cause of Air New
Zealand's difficulties was a bad business decision in Australia,
but the government could have facilitated a sale to Singapore Airlines,
to the long-term strategic benefit of the airline, had it acted
promptly. Instead it has sunk over a billion
dollars of taxpayers' money into the company. Despite strenuous
management efforts, shareholder value has been lost. At the present
market capitalisation of $885 million, taxpayers are poorer to the
tune of over $100 million. Since the beginning of this year,
the company's share price has fallen by over 30% compared with a
rise of over 10% in the market as a whole. Far from being a case study against
privatisation, the Air New Zealand experience shows why politicians
shouldn't force taxpayers to be exposed to business risk. Airlines
are particularly risky: as Warren Buffett once observed, investors
would have been done a favour if someone had shot down Kitty Hawk
on its first flight. Those who lament the level of foreign
ownership of companies like Telecom overlook the fact that New Zealand
institutions are typically up to their prudent portfolio limits
in Telecom's stock. Some 75% of Telecom's issued capital has to
be held offshore, otherwise New Zealand investors would be exposed
to undue risk. Privatisation is a pragmatic policy:
it generally works. New Zealand appears to be the only OECD country
with a government opposed to privatisation. This can only be an
ideological position. Central and local governments are
still running business operations involving many billions of dollars
of assets that would typically be managed better in the private
sector. The Business Roundtable study estimated that New Zealand could gain around 1 percent of GDP by privatising SOEs alone (leaving aside council-owned businesses). That is a lot of national income to forgo. Roger Kerr is the executive director of the New Zealand Business Roundtable. For more information, contact: Roger Kerr Web: www.nzbr.org.nz |