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The lessons of privatisation - Anderton Speech

Hon Jim Anderton

2 October 2001 Speech Notes

The lessons of privatisation

Address prepared for

Plenary Session

Commonwealth Business Forum

Challenges for Infrastructure Development: Private-Public Partnerships

Honoured colleagues and delegates,

I’m reminded of the old story about a surgeon, an engineer and an economist discussing which profession has the longest history.

The surgeon said medicine was the oldest, because when the Lord created Eve, he took a rib from Adam¡Kthe first example of surgery.

The engineer pointed out that first came engineering when the heavens and the earth were created from the chaos.

And the economist said, “yes, but who do you think created the chaos.’

It is difficult to outline New Zealand’s recent experience of private-public partnerships without considering the chaos that economic policy can wreak.

In the mid-eighties, the New Zealand government of the day began a programme of privatisation.

It was continued by successive governments through to the election of the present Labour-Alliance Coalition in 1999.

In that time almost every configuration of public and private ownership has been tried.

For many years, the term “public-private partnership’ was a code word for privatisation.

In New Zealand today, partnership in almost every strategic sector is emerging because of a need for the public sector to re-enter the frame.

As far as I am aware, no other country in the eighties and nineties deregulated and privatised as far or as fast as New Zealand attempted.

In banking, electricity, telecommunications and transport, to name a few, the public sector is making a come-back.

Attempts to create a market in the electricity industry led, in 1998, to blackouts lasting several weeks in our largest city, Auckland.

The industry was privatised first by handing out tradeable share certificates to customers of local, community-owned retail companies.

The opportunity costs for many consumers of holding a large, easily convertible share certificate were obvious.

Individual share-holdings were quickly aggregated into privately-owned monopolies.

Consumers were encouraged to change electricity suppliers, and then found it almost impossible to do so.

Energy companies couldn’t put together switching agreements that ensured electricity stayed connected, meters were read and customers received bills.

As recently as this year, a national drive to reduce energy consumption by ten per cent had to be launched at the height of winter.

The market failed to anticipate demand and ensure adequate supply to meet it.

As in California, where similar reforms have been abandoned, the policy has had to be revisited.

Last year the Government commissioned an inquiry which revealed the industry is too fragile now to sustain another round of restructuring.

No one now seriously expects the electricity market to deliver adequately in the foreseeable future.

In telecommunications, privatisation brought net disinvestment in technology for most of the nineties.

A near monopoly firm was able to increase consumer prices every year, even when the availability of new technology should have been driving prices down.

International comparisons revealed New Zealanders paying very high sums for line rentals, domestic and international toll calls and mobile services.

Another inquiry commissioned by this Government found that the solitary weapon of competition law alone was inadequate for optimal development of the industry.

Poor competitive conditions produced poor investment decisions and unsatisfactory consumer service.

More seriously, the prospect of non-metropolitan areas falling steadily behind in the availability of broadband services threatens the viability of entire regions.

The Government has responded by introducing industry specific regulations.

The Government is also again entering the telecommunications sector, albeit in a minor way.

We are piloting broadband schemes in partnership with local communities and telecommunications companies aimed at ensuring all of New Zealand can harness a digital future.

In the mid-eighties, the public sector owned four commercial banks.

By the early nineties, it owned none, and not a single major financial institution was New Zealand owned.

Many parts of New Zealand lost banking services altogether.

Resentment at the level of bank charges rose every year, as banks repatriated very high levels of profits overseas.

The absence of any significant New Zealand-owned financial institutions brought widespread further problems.

The flow of profits out of New Zealand seriously worsened out current account deficit, at a time when it was already critically impaired.

The loss of services from regional New Zealand undermined the viability of those regions.

As banks left, so too other businesses would depart.

The new Government has responded by allowing the publicly-owned New Zealand Post to establish a “People’s Bank.’

The problems of privatisation have been most spectacular recently in aviation.

In 1993 the Government of the day sold New Zealand Rail.

Its purchasers this year announced an intention to withdraw from passenger rail services altogether.

Rail services in many parts of the country are under threat.

The Government has exchanged letters with Tranz Rail on a possible agreement to re-purchase the Auckland rail corridor.

In some parts of the country - such as the lower half of the South Island - central government is offering to subsidise services directly, in partnership with local government.

Supporters of the market usually held out Air New Zealand as a model of privatisation.

In 1988 Air New Zealand was sold to a consortium for $660 million.

The Government of the day retained what was called a “kiwi share’.

It ensured a majority of New Zealand directors on the board.

The structure was designed to secure New Zealand’s bilateral landing rights.

As many of you will know, this glittering jewel in the Crown of the market has fallen on hard times.

It purchased the major Australian airline Ansett last year at too high a price.

In September, Air New Zealand was forced to write off its purchase of Ansett, with a loss of $1.3 billion.

These circumstances have left the government with little alternative but to take an active interest in the future viability of an Air New Zealand, for the wider good of the country.

The Government has, in the national interest, taken an active was left with little realistic alternative than to enter negotiations to provide financial support for Air New Zealand.

One of the main criticisms we faced in deciding to establish a People’s Bank, was the problem of so-called “moral hazard.’

This is the claim that a publicly-owned bank will possess a market advantage because of the perceived likelihood that a government will not allow its own bank to fail.

I have never found this objection persuasive.

However, it’s ironic in the New Zealand context.

We have just discovered that the moral hazard applies equally to privately-owned investment in strategic infrastructure.

Airlines, like railways, roads, telecommunications and financial architecture are part of the cement that enables the market to function.

They have to be there when you want to use them.

One of the theoretical strengths of the market is its ability to clear away inefficient firms and replace them with more efficient investment.

But New Zealand’s experience has been that failure of an infrastructural business has knocked over many efficient businesses.

The Auckland power black-outs, for example, wiped out many small businesses, and significantly dented GDP.

The growth lost through an episode like that is never recovered.

The New Zealand experience of industries such as aviation and electricity has shown the benefits of collective ownership sometimes outweigh the sum of individual ownership.

Democratically elected power boards in Auckland may well have made the errors that resulted in power black-outs there.

But there is little doubt that the voting public would have responded rationally at the next election and “rationalised’ the companies concerned.

In public ownership, Air New Zealand would almost certainly not have bought Ansett Australia.

I am equally unenthused about the so-called half-way house: private financing of public sector projects.

One example of that saw a local hospital board borrowing to build a new hospital at a commercial interest rate of around 12%.

The Crown could have borrowed the money for about half that rate.

There are only two reasons why anyone would arrange for hospital-borrowing at the higher rate.

One is that it hoped for improbably high productivity growth achieved solely through the financing arrangement.

The other possible reason is poor organisation of public finances, preventing capital from being raised at the lowest rate available to the Crown.

One lesson is that demands for private sector involvement arise where the public sector is doing its job poorly.

It would leave the wrong impression if I didn’t also examine examples of public sector failure.

In New Zealand in the late nineteen-eighties, a formerly publicly-owned investment bank called DFC collapsed.

The reasons for its failure are illustrative:

- It received mixed messages about its role, having been set up to fund regional and SME development and then moved to financial speculation.

- It was run for too long as almost a public sector department, rather than as a business.

- It had no idea of its cost of capital, because the government of the day kept picking up its deficits.

The present government has recognised that sometimes publicly-owned businesses have to be allowed to fail, where alternative suppliers exist.

This year a State Owned Enterprise - Terralink - became the first to be put into receivership.

The lessons of running a successful public enterprise have been demonstrated by our Post Office.

NZ Post offers the cheapest standard letter rate in the world.

It is highly profitable, it has a clear strategic focus, strong management, good disciplines, and a forward strategy including moving into banking and expanding overseas.

The lesson is that public sector is not just public - it also has to be enterprising.

The public sector cannot be successful where it attempts merely to stand still and administer.

It needs to be accountable, innovative and adaptable.

It needs to make good investment decisions, have clear objectives and it needs to meet the market.

In the case of the public sector, “meeting the market’ means meeting the needs of the wider public who own it.

The New Zealand experiment saw the public sector attempt to withdraw from investment in infrastructure.

The experiment largely failed.

Circumstance is bringing back the concept of public enterprise.

The model being adopted in almost every case is one of partnership with the private sector.

It is beginning to restore some balance to public policy.

In my view it offers much brighter prospects for New Zealand’s overall economic development than we have seen for nearly 25 years.

ENDS


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