|The Myths about Privatisation
|This excellent article by Roger Kerr appeared in today's Dominion Post:
Privatisation Myths Need To Be Busted
There are an extraordinary number of myths about privatisation, more than
can be busted in a single article. (For a continuing series, see my blog on
Some are perpetuated by supporters of the policy, not just opponents.
Myth#1 In a supportive article in the Dominion Post of February 23, Terry
McLaughlin, chief executive of the New Zealand Institute of Chartered
Accountants, wrote, "privately owned businesses consistently outperform
publicly owned businesses."
This is clearly not the case: some private firms fail and some publicly
owned ones perform well, at least for a time.
The correct statement, supported by much economic research, is that, on
average and over time, privately owned businesses outperform publicly
This is the necessary and sufficient finding for policy purposes. As the
Nobel laureate George Stigler wrote, "we must base policy not upon signal
triumphs or scandalous failures but upon the regular, average performance
Myth #2 Privatisation is ideological. To the contrary, it is pragmatic: it
(generally) works. When the Thatcher government embarked on
privatisation in the 1980s, some regarded it as a leap of faith. It was not a
popular policy to advance but was supported when the benefits became
clear. As a British minister said, "facts overtook the debate."
The genuinely ideological argument is the reverse: the Marxist attachment
to "public ownership of the means of production, distribution and
Myth #3 Privatisation is needed to reduce debt. This is a secondary
argument: privatisation is really just a transfer of ownership. The policy is
desirable regardless of New Zealand's (public or private) debt position. I'd
be happy to see the government simply give away shares in state-owned
enterprises to their true (but disenfranchised) owners, taxpayers.
Myth #4 The government should own SOEs because it has a lower cost of
(debt) capital. This is one of the oldest of economic fallacies, recycled
recently by British academic David Wood on a visit to New Zealand
sponsored by the PSA. If it were true, the government should take over
most businesses in the economy! But it isn't - the economic risk and cost
of a project, and hence its cost of capital, is unaffected by the source of
funds. Government borrowing is (largely) risk-free only because the
government can force taxpayers to fund losses.
Myth#5 SOEs were sold too cheaply. In fact almost all privatisations in
New Zealand were conducted through an open and competitive sales
process with anyone in the world able to bid. The price obtained was
therefore the best available. The price paid for Telecom ($4,250 million in
1990) was widely seen as high and a positive surprise to the market.
Fletcher Challenge clearly paid too much in retrospect for the Forestry
Corporation but hindsight is an irrelevant standard from an investment
Myth #6 Privatisation leads to more foreign control over New Zealand. Not
so: it may lead to a level of foreign control of the privatised company (which
is inevitable and desirable for large listed companies: domestic institutions
must have diversified portfolios) but not to more overall foreign ownership
of New Zealand assets. When a foreigner buys New Zealand assets they
must exchange them for an equivalent New Zealand claim on foreign
assets. The net claims on New Zealand from the rest of the world are
Ironically, many of the people who regard the privatisation of Tranz Rail as
a failure also wrongly make this complaint. But in the case of Tranz Rail
overseas investors did not achieve returns that covered their cost of capital
- the likely result was a reduction in net claims on New Zealand.
Myth #7 The government loses financially from privatisation because it
forgoes dividends. This is nonsense: the sale price reflects all future
expected dividends paid up front. In addition, the government will capture
in the sale price some of the likely efficiency gains resulting from
Myth #8 Air New Zealand is a good model for the government's partial
privatisation approach. Air New Zealand is innovative and it is performing
well operationally. However, it has not been meeting its cost of capital (by
perhaps as much as half in the last financial year), meaning that potential
national income has been sacrificed (New Zealanders are poorer than
otherwise). Treasury numbers indicate Air New Zealand's value (market
capitalisation) more than halved between 2007 and 2010. A private firm
that fails to meet its cost of capital (like Fletcher Challenge in the 1990s)
ultimately has to cut costs, end loss-making activities or restructure, but
there are weaker pressures on Air New Zealand.
How has this litany of myths been allowed to persist?
Arguably, because politicians (and others) failed to explain and defend
privatisation. It is a classic example of the Big Lie - repeat the same thing
over and over again and people will believe it.
The government will need to do better if it is to sustain its case for partial
Roger Kerr is the executive director of the New Zealand Business
Roundtable. Check out his blog on www.nzbr.org.nz