Wednesday, 9 October 2013

The economics of the asset sale referendum

The leaflet from the Electoral Commission arrived today with the details of the Citizens Initiated Referendum on the government's asset sales: do I support the government's selling up to 49% of assorted companies?

I certainly do, and if (as seems likely) the referendum is threatening to go the other way, here's why a Yes vote makes more sense.  In my view, there isn't a single good economic argument for the government continuing to hold its current commercial portfolio.

Let me lay out the reasons, and also point out I'm recycling (with their okay) a piece that I wrote back in 2010 for the excellent Unlimited magazine.

For a start, would any of the goods and services produced by government-owned entities not be provided, but for state ownership?

No. The government's got an airline, a bank, coal mines (now, apparently, co-owned with Solid Energy's banks), dairy farms (!), electricity generators, an insurance company (ACC), media companies (Radio NZ, TVNZ), some network infrastructure (Kordia), railway tracks, a postal service, and a trustee company. Every single one of these services can, and routinely is, delivered overseas by the private sector. Even postal services: right now, the UK government is privatising the Royal Mail. Even railway tracks: the UK's were laid by the private sector in the first place.

Nor is it obvious that there are market failures or some other sort of special feature that requires the state to be involved in this portfolio of activities. Some of these activities - state-run dairy farming being the most egregious - have no public policy rationale whatever for public ownership.

Do we need to own any of these companies to prevent them ripping us off?

No. There are at least two better ways of dealing with whatever rorts they might get up to. First best, self-evidently, is competitive markets: if you want some plumbing done, you don’t buy and operate your own plumbing company, you get three quotes. And second best is good regulation: keep the profits to a reasonable level that works for both provider and consumer.

We also know that privatised companies tend to perform better. The evidence from formal research is that state entities are less efficient than private ones, which we discovered for ourselves when we corporatized the SOEs in the first place and shook out their massive overstaffing.

And why were they overstaffed? Partly because it was politically convenient to put grateful voters on the payroll. Governments aren't philosopher kings, running operations from first principles of icy purity. They have an eye for the main chance, and if the SOE's payroll run helps, so be it. As the Arab spring got underway, I wasn't surprised to see that one of Hosni Mubarak's early moves was to award the already bloated Egyptian public sector workforce a large pay rise. It didn't do him any good in the end, but even if it had, who wears the cost of this kind of political largesse? You and I do, as consumers of needlessly inefficient and expensive public services.

And anyone who believes in a public service “quality” that won't be delivered by lowest common denominator profit-grubbing capitalists hasn't been watching the tat that TVNZ produces (both when it had its "public charter" role and since). There are exceptions - I've got the Concert Programme playing in my office as I write this - but it doesn't make a good general case.

There’s also a lot of evidence from overseas that access to the services that privatised companies provide gets better post-privatisation: you don’t see customers of private sector utilities waiting five years for a phone line or a water connection, for the obvious reason that there’s a buck in it for the supplier to do it now.

Opponents of privatisation tend to be keen in particular on various permutations of the "you're selling the cash cow" argument. None of them makes much sense.

You're giving up the dividends you would have got by keeping them in public ownership? Well, yes you are, but so what? Every time anyone sells a share, that's what they are doing. And the price they get includes the value today of those dividends they expected to have got tomorrow. If that stream of dividends looked to be a real goer, with prospects of higher and higher profits in the future, the price today is fairly steep to give them up. It's a fair trade. If it wasn't, we wouldn't have willing buyers and willing sellers in sharemarkets in the first place.

The fiscal balance gets worse, opponents claim, typically by arguing that the dividend income the government gets is greater than the cost the government pays on its debt. Well, there are two things wrong with that. The first one is the point made a moment ago - the government is being well-paid in the share price today for what it might have earned in the future. And the second is that the empirical evidence is against the idea, since in the longer run the government's tax take from profitable companies in the private sector tends to be larger than the dividends it would have got from less profitable companies in the public sector.

I suppose what baffles me most about the opponents of privatisation is why they are so keen to keep wholly commercial activities in public ownership, when genuinely public services are short of funds. Which would they rather have: another bank, another 'reality TV' programme, another dairy farm, another coal mine? Or another (or better) hospital, another (or better) school for kids with special needs, another (or better) university, more (or better) public transport?

Because that's the reality. The government's got a budget constraint, like the rest of us, and a dollar in one direction is a dollar that isn't going in the other. You can watch 'celebrities' rolling in mud on TV2, or you can have cataract operations for older folk.

What'll you vote for?


  1. Agreed on the theory, but to me this asset sales programme has been polluted by so many stunts and gimmicks (loyalty bonuses, buy-now-pay-later) that it's difficult to be confident that the sale price does equal the future dividend stream.

    In principle, I support asset sales, but am marginal on this asset sales programme.
    In principle, I support free trade agreements, but not the TPP.

    The difference between the ideal and the actual can be large.

  2. Thanks. I gather from comments from other folk that you're not alone on the TPP, and I too wonder why the terms are being kept so quiet, but I'm still inclined to take almost any genuine trade-advancing agreement rather than none. I might baulk at a mixed bag of trade liberalisation in some areas, coupled with new restrictions (eg more onerous copyright protection) in others, it if didn't look like an overall net benefit, and I gather there may be trade-offs like that in the TPP, but as a general rule it's probably best to keep the liberalisation momentum going even if it means only modest progress

  3. My memory's hazy, but didn't the collapse of multinational trade talks last time lead to some pretty good trade agreements with individual countries, including China?

    1. Sure. You get what you can, but the first best (I'd suggest) is multilateral and wider agreement, and if you can't get that, then settle for the regional/bilateral stuff, though there are always risks that doing deals on the side further jeopardises the momentum for multilateral progress

  4. Can't say I do support the government's plan, see here for why, but I would support selling 100% of the SOEs.

  5. Thanks Paul. I can see the arguments that 49% private sector stakes don't alter the efficiency incentives very much. You wondered in your May post why Greens/Labour don't make those points - I suppose because they don't want to concede the 'private sector has incentives to be more efficient' point? In any event, what baffles me is why they don't countenance swapping commercial SOEs for investment in genuinely public infrastructure.


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