Thursday, January 27, 2011

Being rational about privatisation

If there is one issue that is guaranteed to result in hyperboles, reality evasion and emotive banality from New Zealand’s left, it is raising the issue of privatisation of state owned enterprises. I think sometimes that those who claim to be “centre-left” are really hardline Leninists, who react as virulently as Mao’s Red Guards to those who don’t follow the “correct line”.

As a libertarian, I don’t believe the state should be engaged in owning and running businesses at all, because nobody should be forced to have their money tied up in any business. Some businesses the state owns are unviable in their own right and should either shut down, or be severely scaled back. They destroy wealth, and sustaining them is nothing more than taking from taxpayers to subsidise the customers of these businesses, who would otherwise either pay a full market price or go elsewhere. Kiwirail being a good example. If it was properly privatised it would still exist, but not on the scale it currently is at, which is driven by politics, not economics. Bear in mind though that key competitors of Kiwirail are state and local government owned, in the form of roads and ports. This significantly blurs questions of fair competition.

Others are profitable in their own right, but are constrained to expand because they don’t have enough capital and because the state, as a shareholder, tends to resist such expansion. Winston Peters stopped the Airways Corporation, an efficient operator by world standards, from expanding into other countries. An outrageous destruction of opportunity by a New Zealand company that could have taken its international best practice and earned foreign exchange from doing so. NZ Post is in somewhat of a similar position, being an excellent operator which was shoe-horned into entering the local banking sector by Jim Anderton, instead of entering foreign postal markets where it has true world-class expertise.

Some undermine competition and investment from the private sector, because the private sector knows state owned companies don’t fail. Ask yourself why there has been next to no new entry in the electricity generation market as the state has maintained ownership in 70% of generating capacity. Indeed perversely, after nationalising Air New Zealand, the last Labour Government deliberately tried to engineer the suppression of competition in the New Zealand aviation market, by promoting a Qantas part purchase of Air New Zealand. This would have effectively handed the state owned airline virtually all of the domestic, and 80% of the trans-tasman airline market. As it happens, competition authorities stopped the government creating this monopoly, which was not one of entrepreneurs, but the state colluding with a company that itself had its hands manipulating its government.

In cases where competition exists or can reasonably exist, it seems difficult to sustain any argument that the state should be in that market. Examples of this range from banking, to farming, retail energy production, exploration and supply, transport services, broadcasting outlets, telecommunications, postal services to housing. A state owned competitor at best can perform moderately well and be seen as any other player (how many people think electricity supply has been privatised and don’t realise most of the companies in the sector are state owned?). At worst it can distort competition and investment, as competitors see it as the player that cannot fail, even if it underprices and performs badly.

However, is there a case for the state owning any businesses, particularly ones some economists refer to as “natural monopolies”? I would argue no, and measures can be taken at privatisation to manage this over the medium term (such as requiring certain terms and conditions to be applied to competitors, and transitional measures of price control such as happened with Telecom). Yet this isn’t the issue presented by the Prime Minister’s announcement.

He is talking about a part-privatisation of five government companies.

One, Air New Zealand, is already part privately owned, because the last Labour government did not nationalise all of the shareholding. Given the Labour Party sought to sell 20% of Air NZ to Qantas (and Qantas did acquire 5% which it has since sold), the credibility in opposing any sell down of Air NZ is completely empty. Air NZ faces intense competition in some parts of its business, particularly Trans Tasman and long haul traffic to/from Europe. However, it isn’t individual kiwi shareholders it needs, it actually needs a massive injection of capital so it can expand and work more closely with its foreign partners. Whilst it has performed adequately, this is a highly volatile sector, and the airline is weak if it does not have strong support from highly capitalised partners.

Another, Solid Energy, is a commodity producer and exporter in a competitive international market. Some people find what it produces (coal) to be immoral, such as environmentalists. Quite why they should be forced to own a coal mine is beyond me. Quite why the Greens think so is beyond me even more. Solid Energy isn’t a great performer, it doesn’t make a good return on its capital. It has been erratic in paying dividends. There appears little value in the state holding onto it.

The other three are competitive electricity generators and retailers, Mighty River Power, Genesis and Meridian. They all compete with each other, and with the main private generators/retailers Contact and Trustpower. If it is fine for the private sector to have 30% market share, you may wonder quite why it can’t have all of it. Providing adequate power generating capacity to meet demand is a serious issue, and one that isn’t facilitated by companies that dominate the market but are themselves undercapitalised.

By no means would part or even full privatisation of any of these companies deliver harm to consumers, but are taxpayers losing out?

Well it depends on the following:
- Are the companies constrained from success by a lack of capital? In all cases, the answer is probably less. Extra capital means government borrowing or more taxes to “invest”. I doubt whether really faced with the question, most New Zealanders want to be forced to do this.
- Are the companies making returns better than the government debt their sale would retire? Bernard Hickey says yes, but I’d argue that this snapshot is a poor representation of the long term capital value. Solid Energy and Air NZ have not been good returns over a longer period, so these can be ruled out.

So if the electricity companies are making good returns does it still mean the state should hold onto them, because they make more money than the interest on debt that would be saved if they were sold? Well no. It does not make it moral to continue to force people to indirectly “own” any companies at all.

You see the underlying premise of state ownership of companies is force. You are all forced to have a stake in these companies, without actually having any of the privileges of ownership. You don’t get a dividend, the state uses it to spend on what it chooses (which the left assume you benefit from, but it is all in the mix). You get to inject money into the company without your consent. Most of all, you simply can’t get out of this deal and use the money yourself, since you may make more money if you simply had the money in your own hands.

Which raises the question of whether privatisation might better be carried out in some cases, not by selling shares, but by issuing them to New Zealand citizens in equal quantities. That would be true public ownership, and then the “average” “ordinary” “Kiwi Mums and Dads” or whatever sugar-coated adjectives are used, can decide using their own minds, whether they want to be shareholders in power companies, banks, a postal operator, farms, service stations, a railway, an airline etc. Many will want to, many would rather use the money to pay their mortgage, or put into their own business or put into savings. What would be wrong with that, except that an awful lot of socialists don’t actually like people making their own decisions with their own money, because they want to make the decisions for them.

So when the left talks about thinking about the average person, what they are saying is they want to think for them. Ownership by the public is not what the left wants, it is ownership by the state, controlled according to what politicians think is good for the public.

Paternalism pure and simple.


Spider_Pig said...

Excellent post. I'm opposed to private ownership for the exact reasons you mention, most importantly the ownership by force.

It's amazing how phrasing the question can alter someone's answer. Do you agree with state ownership of Meridian? Typically the answer is yes. Turn it around and ask: Are you in favour of forced ownership of Contact shares? The answer is obviously NO!

libertyscott said...

I assume you mean you're opposed to PUBLIC ownership?

Ad Libertas said...

I don't understand why the idea of privatization by issuing share parcels of SOEs equally to NZ'ers is not more frequently advocated.

It seems to me it would be a politically (though perhaps not economically) ideal privatization strategy, in that it silences the arguments about privatization benefitting the rich at the expense of all NZ'ers, and the fear of foreign ownership most NZ'ers seem to suffer from.