By Roger Kerr, NZ Business Roundtable executive director
There are an extraordinary number of myths about privatisation, more than can be busted in a single article.
Some are perpetuated by supporters of the policy, not just opponents.
Myth #1
In a supportive article in the Dominion Post of February 23, Terry McLaughlin, chief executive of the New Zealand Institute of Chartered Accountants, wrote, "privately owned businesses consistently outperform publicly owned businesses."
This is clearly not the case: some private firms fail and some publicly owned ones perform well, at least for a time.
The correct statement, supported by much economic research, is that, on average and over time, privately owned businesses outperform publicly owned ones.
This is the necessary and sufficient finding for policy purposes. As the Nobel laureate George Stigler wrote, “we must base policy not upon signal triumphs or scandalous failures but upon the regular, average performance of policy.”
Myth #2
Privatisation is ideological. To the contrary, it is pragmatic: it (generally) works.
When the Thatcher government embarked on privatisation in the 1980s, some regarded it as a leap of faith. It was not a popular policy to advance but was supported when the benefits became clear. As a British minister said, "facts overtook the debate."
The genuinely ideological argument is the reverse: the Marxist attachment to "public ownership of the means of production, distribution and exchange."
Myth #3
Privatisation is needed to reduce debt. This is a secondary argument: privatisation is really just a transfer of ownership.
The policy is desirable regardless of New Zealand’s (public or private) debt position.
I’d be happy to see the government simply give away shares in state-owned enterprises to their true (but disenfranchised) owners, taxpayers.
Myth #4
The government should own SOEs because it has a lower cost of (debt) capital. This is one of the oldest of economic fallacies, recycled recently by British academic David Wood on a visit to New Zealand sponsored by the PSA.
If it were true, the government should take over most businesses in the economy.
But it isn’t – the economic risk and cost of a project, and hence its cost of capital, is unaffected by the source of funds.
Government borrowing is (largely) risk-free only because the government can force taxpayers to fund losses.
Myth #5
SOEs were sold too cheaply. In fact almost all privatisations in New Zealand were conducted through an open and competitive sales process with anyone in the world able to bid.
The price obtained was therefore the best available.
The price paid for Telecom ($4,250 million in 1990) was widely seen as high and a positive surprise to the market.
Fletcher Challenge clearly paid too much in retrospect for the Forestry Corporation but hindsight is an irrelevant standard from an investment perspective.
Myth #6
Privatisation leads to more foreign control over New Zealand. Not so: it may lead to a level of foreign control of the privatised company (which is inevitable and desirable for large listed companies: domestic institutions must have diversified portfolios) but not to more overall foreign ownership of New Zealand assets.
When a foreigner buys New Zealand assets they must exchange them for an equivalent New Zealand claim on foreign assets. The net claims on New Zealand from the rest of the world are unchanged.
Ironically, many of the people who regard the privatisation of Tranz Rail as a failure also wrongly make this complaint. But in the case of Tranz Rail overseas investors did not achieve returns that covered their cost of capital – the likely result was a reduction in net claims on New Zealand.
Myth #7
The government loses financially from privatisation because it forgoes dividends. This is nonsense: the sale price reflects all future expected dividends paid up front.
In addition, the government will capture in the sale price some of the likely efficiency gains resulting from privatisation.
Myth #8
Air New Zealand is a good model for the government’s partial privatisation approach. Air New Zealand is innovative and it is performing well operationally. However, it has not been meeting its cost of capital (by perhaps as much as half in the last financial year), meaning that potential national income has been sacrificed (New Zealanders are poorer than otherwise).
Treasury numbers indicate Air New Zealand’s value (market capitalisation) more than halved between 2007 and 2010. A private firm that fails to meet its cost of capital (like Fletcher Challenge in the 1990s) ultimately has to cut costs, end loss-making activities or restructure, but there are weaker pressures on Air New Zealand.
How has this litany of myths been allowed to persist?
Arguably, because politicians (and others) failed to explain and defend privatisation. It is a classic example of the Big Lie – repeat the same thing over and over again and people will believe it.
The government will need to do better if it is to sustain its case for partial privatisation.
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Roger Kerr is the executive director of the New Zealand Business Roundtable. www.nzbr.org.nz
36 Comments
Myth #9
Private Management is more efficient than the equivalent public management team
Indeed private management teams are more efficient at covering up their errors because the team does not suffer the scrutiny of public accounts. Either they fudge the SNAFU to make it less costly or they have the time to push it elsewhere or into another time frame and dilute.
More Roger Kerr! Great, Bernard.
Out the window goes your reputation for hosting non-ideological and even-handed analysis.
The other month they had a good article in the Herald showing the various pros & cons of privatisation. But not with Kerr. Its boosterism all the way. I wonder why.
A reminder that this is from the same ideology that sold off BNZ etc to the highest bidder, providing them with windfall profits & ignoring the possibility of building a shareholder culture among Mom & Pop investors. This was when Business Roundtable power was at its peak.
This from the ever-reliable Brian Gaynor (probably a lefty radical to Kerr):
"The huge media coverage of the proposed sale of further Crown-owned assets is not surprising given the terrible mess our politicians made of this process two decades ago.
... These sales were highly controversial because they enriched a number of overseas investors and a few New Zealand business people.
... politicians will have to proceed with caution because the electorate will need continual reassurance that there won't be a repeat of the Telecom, BNZ, Air NZ and Tranz Rail debacles"
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10702745
Cheers
Re; Myth #2 - You obviously didn't live in the UK, as I did, post the 1980's privatisations. A good example of what happened was Yorkshire Water, which supplied sewerage and fresh water supplies to the Yorkshire region. A couple of years after this privatisation the shares had more than doubled. However it was later discovered that the only reason for this was that the necessary maintenance expenditure had been drastically cut and therefore profits and dividends rose significantly. Then the results of these reckless decisions became apparent. 30% of all potable water supply was being lost due to leaky mains. As a result a major hospitals water supply was cut off for days in order to do the necessary repairs. Also sewers, and the roads above them, began collapsing because of the lack of repair. The Chairman and senior management of Yorkshire Water were forced to resign, but they all walked away with multi-million pound pay-offs. Who says incompetence doesn't pay?
I remember yorkshire water they were notorious....I also remember 25% losses, might be it got to 30% after I'd left.......
Kerr is a politcal mouth piece for Act and well deserves to be ignored....anyone with sense can ask / remember what has happened to the ex-public now privitised NZ companies and why they are considered worth so little in the NZX...answer because they have been run into the ground once sold off.....Also ask why are existing NZX companies are of so little value, answer they have been run into the ground and loaded with crippling debt....Whitcouls comes to mind......Another bright buy, Yellow pages...any fool should have seen their market was in decline....so while yes Public organisations can be second rate they are not alone in that achievement........
regards
Other examples of the impact of privatisation in the UK include power and gas prices falling in real terms so that UK consumers paid pounds 8 billion less for energy supplies than did German ones in the fifteen years after privatisation, about 10 billion pounds worth of investment in new gas supply infrastructure, objective performance standards for all water companies (except Scottish, which remained in public ownership) improving and companies which had previously been a drain on the Exchequer becoming sources of tax revenue.
My numbers might be a bit rough, just adding up what I have read in the news media, but the reason put forward for selling state assets is because the country is in a $40 billion financial black hole, made up of the CHCH disasters $20 billion less re-insurance of $5 billion, plus $11 billion leaky homes, plus $15 billion annual deficit (ongoing). If all the power generators were 50% sold off would it fill that hole? EQC investment account balance is not counted because it has to be replenished. Makes a difference when you add them all together.
The leaky homes problem will probably disappear forever down its own black hole.
Chch I think its other other way around, its 20billion with the Govn having to find 5billion....so 31Million is probably more accurate....
Selling those few SOE's in a minority share earns 340million I think it was....or roughly 10 days borrowing...its not even going to be noticed.....so the Q has to be why, answer political ideology and profits for mates....
If this stupidity goes ahead hell will have to freeze over before I vote National....
regards
Myth1 a) Data complied before SOEs....which so far are proving a good and robust model.....b) False accounting, any idiot can run a compamny into the ground and make it look like there was a profit c) (myth5) Ideologically blinkered pollies give monopolies to the buyers....result NZ voters wallets get pillaged.
Myth2 Privatisation is ideological. To the contrary, it is pragmatic: it (generally) works. No it generally doesnt....of cours eits idealogical show me any party but right wing ones that sell.
"the Big Lie" LOL...........it is you Mr Kerr that sound slike a stuck record....privatisation in the past on balance was poorly done but may have been overall better than keeping some companies eg Telecom. Today the situation via the SOE model reflects the best of both worlds and is doing well...it looks to be an excellent compromise when the public has an interest ie an essential service.
My vote is hell has to freeze over.
regards
Totally with you, BB3.
Kerr's BRT mates presided over the greatest destruction of wealth in NZ history (quite a challenge when you consider the competition), thru mismanagement of the companies they control, destroying shareholder value. But, as you say, enriching themselves handsomely in the process.
And then browbeating successive governments to prevent any regulation which would have reformed the Wild West equities market we are known for in Kiwiland. Witness the latest resulting catastrophe thru the unregulated finance companies.
When I see the country with its shrunken sharemarket and without the money to be able to rebuild Chch properly, with BRT people like Kerr pontificating to us on how we should be managing the economy, it makes my blood boil.
I just hope that Key & English have better sense than Douglas and Richardson, and pay no attention to Kerr and his ilk. Election bribes and all.
Cheers to all.
Myth #1
Kerr - "on average and over time, privately owned businesses outperform publicly owned ones."
- As I see it, this depends largely on a sliding definition of performance, as Kerr is equating 'shareholder returns' with 'public interest' and 'service provision'.
a more honest and accurate representation go something like:
"on average and over time, privately owned businesses excel at transferring wealth to private shareholders, sometimes at a demonstrable cost to to the public interest and to the detriment of public service provision"
We could then debate whether sometimes should be replaced with rarely, occasionally, often or inevitably.
Simon Power wants to put together some form of framework for financial performance for SOEs before he flogs them off. Setting aside his planned departure from politics and moving into ' something in the private sector', a quick look at the proposed criteria says nothing about maintaining the integrity of essential infrastructure such as pricing of electricity and its stability.
The ideaology of (partially) selling SOEs without some form of public gaurantee is a little disturbing.
Myth #2
"Privatisation […] is pragmatic: it (generally) works…The genuinely ideological argument is the reverse: the Marxist attachment to "public ownership of the means of production, distribution and exchange."
- Kerr is blatantly and childishly Invoking the 'communist' strawman here, compounded with an either-or fallacy, and butchering the term 'ideology' in the process.
Very few (sane) people still subscribe to the 'pure' Kerr-Thatcher position that weak-state neoliberalism coupled with maximal corporate ownership delivers the best outcomes to the most people. Furthermore, far from being crypto-marxists, most of us who oppose the sale of state owned power companies simply acknowledge that some state ownership of assets has proven necessary to moderate undesirable market outcomes. Manufactured crises, monopolistic behavior and so on.
Simply put, we want to debate 'what mix of assets should the state hold to insure the best outcomes for all New Zealanders', while Kerr wants to argue that 'the state should devolve it's entire portfolio to the market'. Imbedded liberalism vs Neoliberalism, centrism vs laissez-faire.
All political positions are by definition 'ideological', by arguing otherwise Kerr reveals himself to be either a) a moron or b) dissembling.
Mr Kerr
Do you ever bother to read the comments posted here in response to your articles?
You obviously believe that everything private works for all, No, it works for those who make money out of it .just for an example, I want you to read the cost and productivity of US health care sector which is private and compare it with public systems in NZ,Norway, and other European countries. The US healthcare is the most expesive and it does not good care to all except for a tiny minorty.
@Roger Kerr,
Generally agree, but can you provide more info for Myth #7?
I'm not sure even the market has sufficient foresight to forecast all future expected dividends? (This seems somewhat ideologically based).
Also wouldn't it somewhat contradict your comment for Myth #5, in that Fletcher challange paid too much.
George Soros' theory of reflexivity suggests that the market tends to over and undershoot, which I think represents a closer observation to what happens in the real world.
RK: "When a foreigner buys New Zealand assets they must exchange them for an equivalent New Zealand claim on foreign assets. "
Had to think about this, but I assume he means that if Mr Burns has his USD, he needs to buy NZD in order to pay for the power plant and therefore whoever sells him the NZD, now has USD or a "claim on foreign assets".
I guess that's right, but I'd rather have the power plant, thanks.
If all the individuals and corparates, foreign and local, are so keen to own a chunk of Kiwi business why don't they just start up their own NZ based companies?
The biggest myth of all is that these outfits are adding jobs and exports to NZ inc.
They are, by and large, after rentier type income from utilities, the more monopolistic the better. So instead of adding wealth they become a tax in perpetuity on the Kiwi household. There is no way in hell i would vote for a Government promoting the sale of our power generation or any critical infrastructure asset.
Roger Kerr, I think you are out of touch. Only a national lead government would consider privatisation. Im a national supporter (kind of, if only because the rest are worse and scare the sh*t out of me) So is my wider family. There is no support from me or any of my friends and family towards any privatisation. National rank and file members are against it. Hence Nationals problems fund raising. Privatisation would be plotical suicide, I hate having to pay for things twice and privatisation is a classic.
Therein lies the problem with our political parties. We "support" one over the others not because they provide the best vision for our country but because we perceive them as not being as bad as the others.
Until we get someone that can show true leadership, common sense and a willingness to put it all on the line for the benefit of the people rather than themselves, we're pretty much screwed. All I see is a bunch of overpaid bums who have never worked a real job in their lives, are under qualified for the positions they hold and are just like race horses with blinkers on, the sole focus being to cross the finish line first.
Question now is, what can we do about it? There seems to be intelligent people with good ideas and willing to think outside the box posting on this site, but what are we acheiving? We make up an extremely small percentage of the population so either the majority don't care, are too busy to keep themselves informed or are plain ignorant.
The definition of insanity comes to mind and unless we change the existing regimes we are forever only going to be bitching and moaning about the issues here.
Dear dear Roger...your thin end of the wedge partial privatisation prescription brings to mind the California power crisis...Enron and the like citing "maintenance" outages to manipulate wholesale power rates. Perhaps we, the little people who pay taxes, could all act like good libertarians and purchase private generators to sit in the back yard in the unlikely event of a power cut...
Marxists have at least one thing in common with the Business Roundtable............uncompromising dogmatism.
I'm moving away from my support of labor because of privatization of electricity. After petrol electricity is the most important fuel source for the power of tomorrows cars and by selling this asset before electric cars are the norm we sell at a future loss regardless of weather by todays markets it is a high price.
We should not even be able to give shares to the public in electricity because it should be maintained by the state as a future source of revenue for our future children.
My prediction is that if Labor gets tough on property tax issues they will win the next election.
And look at England where they sold their gold reserves at the bottom of the market - privatization is a bankers wet dream.
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