PRIVATISATION DEBATE SHOULD BE RIGOROUS

It’s hardly a state secret that the government is considering some rearrangement of its portfolio of assets if it is re-elected this year.  Its Investment Statement reporting current asset holdings issued in December provides useful information on available choices.

There is much to consider on the why, how and when assets should be transferred from the public to the private sector.  This 2002 study by Phil Barry was commissioned by the Business Roundtable as a contribution to the debate.   It dealt with many of the myths concerning past privatisations.  (I discussed some in my blog of 9 December 2010.)

Another contribution was this article by commercial law academics Susan Watson and Chye-Ching Huang published in the New Zealand Herald of 15 January.  It made the case for partial privatisation, in line with the government’s assumed intentions.  However, it was not the sort of rigorous analysis that might be expected of academics.

Nowhere did it consider, for example, whether full privatisation would be superior to partial privatisation.  Academic studies clearly favour the former over the latter for commercial enterprises.

Nor did it expose the pitfalls of partial privatisations.  These involve continuing (majority or minority) government stakes in enterprises and the risk that political incentives will dominate commercial incentives (and limit the contribution of entities to wealth creation).  Conflicts between the government’s roles as owner and regulator are not resolved with partial privatisation.

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.

Watson and Huang 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.

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 (which is probably why the 2025 Taskforce recommended full sales for competitive enterprises).  Phil Barry concludes as follows:

… partial privatisation has significant disadvantages compared with full privatisation. Ownership of partially privatised companies is often widely held (outside the government’s stake) and control is not readily contestable; private investors have limited incentive to monitor the company, relying instead on the ‘deep pockets’ of the government to bail out the company if it gets into difficulty; and the company remains open to political interference. Further, governments, as owners, may be unable to agree for long as to why they own the company, thus making it difficult for the company to develop and implement a strategic direction.

The empirical evidence supports the view that partial privatisation is not a desirable long-run state. Most studies indicate that there is no lasting difference between the performance of fully state-owned and partially state-owned enterprises: that is, that full private control is necessary to achieve sustained performance gains. But as a stepping stone towards full privatisation, partial privatisation has merits.

A better article would have reflected these nuances.