Why sell assets to reduce debt? from Gareth Morgan on Vimeo.
The Government’s partial selldown of a number of state-owned assets is almost done and dusted, with only Genesis yet to go on the block. New Zealand has nevertheless instigated a referendum on the issue. That referendum was over whether the public thinks it a good idea to sell up to 49% of our electricity companies and Air NZ. I will be voting yes, and let me explain why.
What really are the substantive arguments for and against? As an economist, my starting point is that government shouldn’t be in business. Sure, there are a few exceptions to this general line (which I will explore below), but I don’t think these assets meet the ‘exceptional ‘ test. Having looked at the substantive arguments, it’s bracing to examine the rhetoric coming from both sides.
I’m sceptical of government-run businesses. There’s a long and sad history of failures and bail-outs, of management incompetence and self-serving behaviour, and of business strategies that are aimed at political, not economic, objectives. At the extreme, we have the experience of the former Soviet Bloc to look at. But those with a reasonable memory will recall spectacular failures closer to home too – such as the collapse and tax-funded bailout of (then state-owned) BNZ in 1990. Owning a business is risky, as this Government has found out with Solid Energy. Private operators can manage that risk better, and if necessary declare bankruptcy, whereas the government has nowhere to go. Also private businesses firstly have to convince the market that it’s worth investing in them, whereas all a State business needs is a bunch of well-meaning but lightweight politicians to be enthused to invest other people’s money. That is why over the last thirty years most governments around the world have privatised business assets and avoided nationalising them.
There are situations however where this general rule that government in business is a recipe for disaster doesn’t apply. The most common situation is when the business in question is dominant in its market. There is only one thing worse than a government monopoly, and that’s a private one. This is often a business that requires substantial basic infrastructure: our national grid Transpower, Rail carrier KiwiRail (and arguably Telecom in the 90s) are good examples of this. Kiwibank appears to have been set up to crack the cartel-like behaviour from the Big 4 Aussie banks – so again it is a question of market power.
Ideally good quality regulation would ensure freedom of competition so most businesses can be privately owned and run. But as we know this is not always possible, and in small economies especially there can be a conflict between the low supply costs that you get from having large businesses operating at an optimal scale, and the benefits consumers get from having more (smaller) players competing in the market.
Our national airline operates in a cut throat industry, and there is no evidence of market power being abused in the electricity sector. Electricity prices have risen, but they needed to. They reflect the cost of new generation – the cost of getting that extra kilowatt. So where is the problem with private ownership?
Labour and the Greens love to point out, the companies with hydro assets can make big profits because of these past investments. But that is not abuse of market power. There are players in every industry with more favourable cost structures, and they make more money than their competitors. Again Labour and the Greens argue that such profits are ‘obscene’ when they are going to firms that aren’t owned by the Government. But so long as a good sales process is followed, the Government will have scooped out the anticipated profit in the sale price of the asset. So it is no big deal, regardless of who buys it.
Then there’s the argument about some assets being “strategic”. Well that term is subject to abuse as well. The most strategic assets for a country are in food production and in New Zealand the government doesn’t own those. So again proponents of this argument have to establish their case, otherwise it becomes little more than ideology.
Rather than argue over private ownership the focus should be on whether markets are competitive and we are doing all we can to ensure that owners of business aren’t screwing monopoly profits from consumers. That can be the case irrespective of ownership. It is actually really hard to build a case for State ownership – not impossible, but in most cases where there’s market distortion regulation can save the taxpayer the capital investment that comes with ownership.
Let’s not forget, the government is pursuing the ‘mixed ownership’ model – the state keeps 51% of the assets in question. So meaningful ownership hasn’t really been given away, the government retains control. Another reason why anyone worried about these companies abusing any market power needn’t lose too much sleep at night.
What about the official reasons for and against the asset sales? Frankly the debate on both sides has been pretty shallow. National has argued about paying down debt and investing the money elsewhere. Labour has been bemoaning the loss of dividends from the power companies. Frankly this whole transaction should be economically neutral, because the sale price will reflect the profits we expect in the future (any sales sweeteners aside). In the end I’d suggest it is a points decision to National: why have our Government money tied up in these assets when it’s the role of the private sector to conduct business? Unless someone has an objection to private business – do we hear that?
The real benefit for NZ Inc from these sales is from getting more money into our equity markets. For too long we have put all our eggs in the housing basket; there simply hasn’t been enough money sloshing around in the NZ sharemarket for it to be a viable alternative for investors to invest in or for businesses to raise funds from. The recent sales provide a much needed boost to this poor cousin of the New Zealand financial system. As I’ve argued before, removing the tax advantages on housing would also be a great step.
So don’t fear for our economic sovereignty or run scared of private ownership. This debate is a storm in a teacup, it is time we put it behind us and moved on to other things.