Last week’s National Business Review (April 8) carried an excellent article by Duncan Bridgeman based on an interview with Professor William Megginson of the University of Oklahoma who was attending a conference in Queenstown.
The article notes that Megginson has spent the past 25 years researching privatisation of state assets in more than 100 countries. He is probably the biggest name in the literature on the topic. A 2001 review article, Megginson, W and Netter, J, ‘From State to Market: A survey of empirical studies on privatisation’, Journal of Economic Literature, is one of the most cited articles on privatisation.
As the NBR article notes:
The review concluded, “privatisation ‘works’ in the sense that divested firms almost always become more efficient, more profitable, financially healthier and increase their capital investment spending.”
The qualifier “almost always” is important. As Megginson goes on to say:
“You certainly have variation in that it doesn’t always happen – but on average, across countries, across time, the financial and operational performance of privatised firms is significantly improved.”
Duncan Bridgeman acknowledges this point when he writes:
Of course, not all privatisations ‘work’ and in New Zealand many people point to the re-nationalisation of Tranz Rail in 2003, Air New Zealand in 2001 and the bail-out of the BNZ in 1990 as proof of calamity.
These were three out of around 30 privatisations by New Zealand governments – confirmation that on average and over time, privatisations ‘work’. For policy purposes, that is the key finding: politicians should not gamble with taxpayers’ money against normal outcomes.
Of course SOEs may not ‘work’ in a number of dimensions either: Terralink failed and many have not met their costs of capital on an annual basis. Also it is arguable whether the failures cited were due to privatisation.
Privatisation in New Zealand is controversial and Megginson notes that “It’s extremely controversial everywhere”. Support usually arises after the event. How many people would today want to reverse New Zealand’s 30 privatisations? – which any government could do, at least in principle.
Professor Megginson also dealt with the proposition that a government will be worse off financially after a sale:
One common misconception is that the government misses out on dividends generated by the firms once they are sold off.
At the campaign Say No to Asset Sales launch this week Labour leader Phil Goff said the state power companies generated dividends of more than $700 million, offsetting the need to raise that money through higher taxes.
But actually what happens is the dividends are factored into the price paid for the asset while the government can still retrieve income by taxing the firm’s profits.
“So if the firm’s profits stay the same the government will at least get a claim on the taxes and if they improve then you are capitalising that stream of earnings.”
Finally, the article states:
National has pledged to retain a controlling stake and give preference to individual “mum and dad” investors.
This is common practice, although it does tend to lower the price offered for the asset.
“It’s a trap for governments because if they under price they are accused of selling cheap,” Dr Megginson said.
“Around the world over 25 years, governments have under-priced with that rationale.”
In my view, the main issue is transferring the business from public to private ownership to reap the efficiency gains. The means are less important. Even giving shares to taxpayers is a valid approach. But there is no good economic reason to criticise open trade sales – the most common method used in New Zealand in the past – since they generally yield the best price for taxpayers.