Kerr on Privatisation

Roger Kerr writes in the NZ Herald:

With the National Party’s decision not to move any state-owned enterprises to the private sector in its first term if elected this year, we appear to have a new political consensus between the major parties in New Zealand: privatisation is bad.

I wouldn’t say that “privatisation is bad” is the consensus, more that “privatisation is very unpopular”.

Indeed New Zealand has done even more to stand out from the crowd: it has gone in the opposite direction with the buy-back of Air New Zealand and now the railways and ferries, the establishment of Kiwibank, the renationalisation of ACC, and the Auckland Regional Council’s reversal of the part-privatisation of Ports of Auckland.

Yep, the state grows and grows.

The position across the Tasman is also instructive. All governments at federal and state level are Labor, and none is opposed to privatisation. Currently the New South Wales government is battling with trade unions to privatise its electricity generators. Victoria did so in the mid-1990s, and in the five years to 2007 electricity prices in Melbourne have risen by less than one-third as much as in Sydney.

Labor in Australia is far more moderate than the counterpart in New Zealand. National has been scared off privatisation because they know a rational debate is so difficult to manage from opposition. I certainly hope that if National wins, they will govern in such a way in their first term to gain the trust of the public, so that if they then propose some modest asset sales in a second term, the debate can focus on the merits of the actual asset being in state vs private ownership, rather than an ideological holy war that all privatisation is bad and all nationalisation is good.

The worldwide moves in the past 25 years to shift state enterprises into the private sector have been driven by the evidence of major economic gains in the form of improved efficiency and profitability, lower prices and better services, and more investment and output.

Indeed. While there are some individual examples which didn’t achieve the above, the evidence if you look at the whole OECD is over whelming. And if we really want to close the gap with Australia, it will be hard to do so with the state running such a major segment of our economy.

This does not mean all private businesses are success stories and all state-owned enterprises underperform. Rather, the point is that, on average and over time, the private sector is better than politicians at running commercial businesses, and governments should not bet against the odds with taxpayers’ money.

Also owning an asset can make a Government reluctant to regulate monopoly aspects of it, because they own it. They try to do hidden regulation, where they drop hints to Directors, or appoint the right Directors, instead of having an open and transparent regulatory process.

Out of some 30 privatisations, criticism focuses mainly on just two alleged “failures”, Air New Zealand and Tranz Rail. Even if true, these criticisms would not weaken the general argument that most privatisations have been successful, but arguably the Government did not need to get involved in either case.

The Air NZ bail out only became necessary because the Government refused to allow Singapore Airlines to invest in the company.

The political aversion to privatisation is costing New Zealand potential gains in living standards. A Business Roundtable study (www.nzbr.org.nz) estimated New Zealand could gain about 1 per cent of gross domestic product a year by privatising SOEs (leaving aside local government-owned businesses).

Unless wages and other incomes in New Zealand are to drift further behind those of Australia and other countries, this is an economic reform that will have to come back on the political agenda sooner or later.

1% of GDP might not sound a lot, but over a decade or so it is massive, and long-term is the difference between having living standards of Australia or of Slovakia.