1 thought on “Rodney Says the Naughty "P" Word

  1. Privatisation is the sale of a state owned asset to the private sector. In New Zealand, privatisation was done by the Labour government in the 80s and the National government in the 90s. The reasons politicians gave for privatisation were to improve efficiency and pay off government debt with the sales revenue. These reasons were very weak.

    Privatisation didn’t make the assets more efficient; corporatisation did. Corporatisation is when a state entity is converted into a state owned enterprise (SOE) which has a business structure, profit maximisation mandate and a CEO on performance based pay just like a private company would. Corporatisation is a prerequisite for privatisation.

    After being corporatised, most of the SOEs generated high rates of return. In an attempt to lower public debt, the government sold many SOEs for well below their true value, mostly to foreign investors. The overall rates of return for the SOEs were much higher than the interest rates on the government debt. It would have been more economical for the government to have held on to the assets and pay the debt off more slowly, rather than privatise them.

    For an investor to want to buy a privatised asset, the asset’s expected rate of return would have to be significantly higher than the interest rate on savings. For a rational government to want to privatise an asset, the asset’s expected rate of return should be less than the interest rate charged on government debt. There is a very narrow margin for privatisation to be economically viable.

    A short to mid term side effect of corporatisation was high unemployment. In order to maximise profit, SOEs needed to lay off unnecessary workers. This freed up labour for more important functions in the economy but it took many years for the unemployment rate to drop back to low levels.

    The biggest problem with the privatisations by NZ governments is the effect it has had on the current account deficit. The current account balance is essentially the difference between the amounts of money flowing into and out of the country. As a result of the privatisations, New Zealand’s current account remains a deficit even today, mostly because of the huge amount of profit flowing out of the country. A lack of asset ownership by New Zealanders is the main reason why NZ slipped so far down the OECD rankings in terms of per capita income. An increase in productivity usually means profits will rise but it hardly ever means workers’ wages will. An adequate level of asset ownership by locals is necessary for the local economy to grow at a significant rate.

    There are good reasons for governments to create SOEs. If a nation has a small population, there might not be anyone living there that has the courage, capital and initiative to start large scale ventures such as airlines and power plants. Governments can borrow large amounts of money at interest rates lower than what households and firms can borrow for. By investing in SOEs, the government spreads the risk very thinly across the whole population rather than having the risk concentrated within a small group of wealthy shareholders which is likely to happen in the private sector.

    It has been said that if SOEs get into financial strife, the government would bail them out. Air NZ was an SOE that got privatised. While privately owned, it got bailed out by the government by renationalising around 80% of it. Whether or not a private company or SOE gets bailed out by the government has more to do with its importance to the economy. SOEs tend to play important roles in the economy. Air NZ is relied upon by the tourism industry and some exporters.

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