Wednesday, 26 January 2011

Partial privatisations by a government without courage

John Boy's announcement today of his intentions for partial privatisation of so-called state “assets” is the weak-kneed response of a lily-livered government to the realisation that has taken three years to dawn on them that theirs is a government unable to pay its way—and that somehow, somewhere, there must be a way to get more without giving anything away what they’ve found under the mattress.

Partial privatisation of entities in which the government should never have been involved is the worst of all worlds.  It’s like sex without the friction.

This is a government out of control. A government deeply in debt, yet committed to spending more than one billion more every new year. The state over which they preside is already

  • The biggest owner of dairy farms in New Zealand;
  • The biggest fund managers in New Zealand;
  • The 50% owner of a large chain of petrol stations;
  • By far the biggest owner of rental properties;
  • The dominant generator of electricity;
  • The dominant owner of our trains and planes;
  • The owner of our most aggressively growing bank

The assets already controlled by government have a book value around six times the value of all the shares on the local stock exchange. Instead of turning this around, this new policy asks for that shrinking private sector to instead further prop up the inexorably expanding state—with taxpayers in their position as willing investors paying again for “assets” originally paid for by the with money extracted from them in their position as unwilling tax-victims. 

It is the illusion of real business activity that only a government could promote.

It is an alliance of dollar and gun for the benefit of everyone and no-one.

It retains government involvement in what are supposedly commercial organisations—leaving the referee in the position of writing rules for itself, and investors in the position of signing up to share in the rent-seeking have government favours (ands monopolies) may bestow up on them.

But at the same time, it pits commercial incentives against political incentives—the latter of which are always certain to triumph over the former, leaving any potential profits severely diminished by the conflict, and few of the new investors able to fully exercise their entrepreneurial acumen with their new assets.

Which means that any of New Zealand’s diminishing stock of investment capital that does find its way into the various entities of mixed ownership will produce far less value from that investment capital than it would if invested instead in purely private profit-making enterprises—leaving the already denuded pool of local investment capital all the poorer for the association.

And it leaves the co-owners in the position of being unable to establish the true value of the state enterprises divested so partially—which in the case some of them (KiwiRail being a glaring example) is a price that without continued taxpayer “investment” is virtually zero. Which means that any investors in these lemons will be in the position of constantly lobbying for more favours from their government partner, and more dollars from the long-suffering taxpayer—seeking as they do to privatise their profits and socialise their losses.

Which takes us back the first objections above.  This is an alliance between dollar and gun in which consumers (in their position as purchasers from these aggrandised monopolies) and taxpayers (in their position as ripe sucks) will assuredly be the losers.

The mild-mannered Roger Kerr deals with many of the myths concerning past privatisations, and has more on the problems attendant on partial privatisation:

_Quote We have seen partially privatised companies remain political playthings, a prime example being the former Auckland Regional Council’s nationalisation of Ports of Auckland.  Earlier experience with the partial privatisation of the Bank of New Zealand was also unhappy.
The authors of a recent trial balloon for the policy that ran in the Herald] note that the New Zealand sharemarket would benefit from partial listings, as did the Capital Market Development Taskforce.  But, other things equal, it would obviously benefit more from full privatisation.  Moreover, partial privatisation of the small entities they give as examples – Quotable Value, Learning Media and Asure New Zealand – would hardly be worth the candle.  Game-changing policy must involve major SOEs such as those in the electricity sector. [But note that these are essentially coercive monopolies enjoying the use of a restricted market to extract usurious rates from consumers.]
    The article cites Air New Zealand as a model of partial privatisation but unaccountably fails to note that the company’s share price performance since the government resumed majority ownership has been poor.
    They also commend the Singaporean Temasek holding company model.  This is also dubious.  The performance of the underlying businesses is not sharply reflected in such a model.
    The authors mention the possibility of restricting privatised company shares to New Zealand nationals, and rightly note that this would depress the share price.  The arguments for such restrictions could only be political.  The idea that foreign ownership is a cost of privatisation is misplaced.  The level of foreign ownership in the economy is determined by the cumulative current account deficit or surplus in the balance of payments, not by which assets are for sale.  If foreign ownership of some assets is blocked, foreign stakes in other assets will be higher.  If this is an issue, a better approach would arguably be to simply give SOE shares to their true owners, New Zealand taxpayers.
    The value of partial privatisation should not be over-stated . . .

… and there is no serious argument against full privatisation.  By which I mean privatisation that returns whatever assets still exist to those who’ve already paid for them.

All that is lacking from National’s limp-dicks is a spine.


  1. Could you please include your sources for your comparison of the market cap and govt assets?

    Also, how would you take into account the value of NZ businesses that aren't listed on the stock exchange? They're still private businesses, after all.

  2. In principle, I agree with you. The problem is the MSM which would be full of stories about selling our heritage.

  3. Wonder how the Greens can oppose privatisation of businesses they hate, such as Solid Energy?

    The hysteria around all of this speaks volumes about the intellectual vacuousness of the MSM and the left.

  4. Any discussion about 'value' and 'performance' is just am exercise in figure shuffling because the important fact is not what the notional value is, but what it can earn in the real world. Unlike the US which has an international-standard currency and is so large as to be (albeit mistakenly) able to simply print more money at will, New Zealand is a tiny economy which surely will succeed or fail on its exports of tangible (not just notional) goods and services to other economies. So, as electricity for example connot be physically exported, surely the best plan would be to keep it 100% in government (i.e. the citizens) ownership and even reduce the price of power in order to give NZ manufacturers the edge. This would also to make NZ an attractive place for overseas companies to do business.

  5. Dave, we had that, look at the results. Electricity prices 400% higher than when Labour entered office. Who had effective control and price fixation abilities? 80% generation government owned, so effectively a govt market. Who controlled the market to stop new players entering the market? Yep you guessed it, the govt via their obstructionist and therefore despised RMA (even they despise it, proven by making it not count for anything they want to do).
    You are correct in that cheap electricity results in better business, as it becomes more worthwhile to invest in non-labour capital, when that capital is cheaper to run than direct labour. The good thing about this is that it frees up that labour to perform other duties, and as we all know the more you produce of valued products, then the better off you will be.

  6. Isn't the problem here that whether in government hands or private hands it's very difficult to structure the market away from some form of monopoly/oligopoly situation?

    In private hands there is incentive to restrict supply, particularly given replacement plant is large capital expenditure.
    Exhibit A would be the Enron experience which had the state of California in brown out conditions.

  7. This commentary should be required reading for every New Zealander who is even remotely interested in their future.
    Want to really fix the problem? Listen up. Eliminate all bailouts, subsidies, giveaways and support systems – both to business and to labor.
    Abolish every government agency that begins with a letter of the alphabet. Then abolish the rest of them.


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