Privatisation: A Third Rail?
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 councilowned businesses). That is a lot of national income to forgo.
Roger Kerr is the executive director of the New Zealand Business Roundtable.