The Dim-Post

January 28, 2011

The battle of ideas

Filed under: economics,Politics — danylmc @ 1:38 pm

I’m not ideologically opposed to asset sales and privatisation. I don’t think the state should own the means of production, or, for that matter, a classical music radio station, the public utility of which is a mystery to me. I do have a very strong gut opposition to infrastructure asset sales for historic reasons: the fire sales in the 80s and 90s were arguably the worst policy decisions in our post-war history, and there was just as much corruption in the mix as there was ideology and incompetence.

So I’m somewhat open to argument. But thus far the battle of ideas seems pretty one-sided. Opponents to asset sales are recommending everyone read this column by Keith Ng, and this piece by Selwyn Pellet, and this by Gordon Campbell and this by Bernard Hickey and this by Brian Fallow. They all make very strong arguments and I haven’t seen much in response. Near’s I can tell the pro asset sales argument goes like this:

All our private companies are rubbish, so investors should be able to own equity in profitable, well-run government companies, which will improve their performance because the government is rubbish and private businesses are profitable and well run.

Obviously they never phrase it quite like that, but this is the basic argument Key, Weldon et al are selling us.

Up until this week my prediction for the election was that National would win > 49% of the vote and be able to govern alone. I no longer think that’s a possibility. Even with Stephen Joyce running their campaign and Phil Goff running Labours you’ll never get an outright majority with a pro-asset sales platform, especially not one this unconvincing.

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32 Comments »

  1. I find it telling that everyone who’s offered a case study of the country losing out after an assest sale is able to chose a different example.

    Comment by lyndon — January 28, 2011 @ 1:42 pm

  2. Yes, i was very surprised that national has come out so early with an explicit policy announcement on asset sales. Thought that would hold back any direct statement to this effect until much later in the term. It’s got time to really sink in now.

    Comment by matthew — January 28, 2011 @ 1:45 pm

  3. No asset is being told, unless you count shares as an asset.

    The asset belongs to the company or the SOE (i.e. aeroplanes, or power plants etc), and they aren’t being sold. The relevant SOE will still own them, and has to own them.

    There is no principle that says by owning shares in a company you own the underlying asset/s of the company as well.

    This might be semantic, but it’s important.

    Comment by Gooner — January 28, 2011 @ 1:49 pm

  4. “Up until this week my prediction for the election was that National would win > 49% of the vote and be able to govern alone. I no longer think that’s a possibility.”

    Which is why you can bet Rodney Hide is safe in Epsom, and Peter Dunne may find his services required for one more trip around the block. Further complicating things, the Maori Party meltdown may help National (by causing some present electorate MPs to be defeated, thus reducing the overhang and the number of votes needed for a majority) or hurt National (by reducing the Maori Party party vote even further while they retain their electorate seats, thus increasing the overhang still further). Or the whole thing may blow over.

    Almost exciting enough to tempt an avowedly sick-and-tired-of-it-all grumpy old-before-his-time curmudgeon back into the blogosphere on a regular basis, no?

    Comment by Andrew Geddis — January 28, 2011 @ 1:51 pm

  5. I’m also trying to get a handle on all these competing arguments too. So far the opposition to the proposed sales seems to fall into two separate categories: 1) ideological, and 2) technocratic, but at the same time the left opposition tries to combine the two (which is fair enough).

    But I think the left needs to be a lot clearer about its orientation towards state ownership. While the Labour Party – and most of the left – might bitterly oppose businesses like Air NZ or Genesis Energy being privately owned (or part-owned), they should take a long hard look at the neoliberal corporatisation model that the Labour Party so strongly adheres to. It’s Labour’s State Owned Enterprises Act 1986 that ensures that so called “public assets” are merely profit-driven businesses that just happen to be owned by the state. It’s a total myth to pretend that the SOEs serve any social purpose beyond being profitable companies.

    I’ve expanded on this in a blog post, ‘A leftwing perspective on asset sales’:
    http://liberation.typepad.com/liberation/2011/01/a-leftwing-perspective-on-asset-sales.html

    Comment by Bryce Edwards — January 28, 2011 @ 2:02 pm

  6. “Yes, i was very surprised that national has come out so early with an explicit policy announcement on asset sales”

    good point. there’s a chance that this is a sop to the right, and will be running hot in focus groups as we speak.

    could be some classic policy-by-populism from Key.

    OTOH, the massive expenditure by this government has been signaling a set-up to make the need to sell a reality.

    Comment by Che Tibby — January 28, 2011 @ 2:02 pm

  7. NZ Inc has a very shallow capital market that is at or near the point of not having the scale to justify the infrastructure and running costs so partially floating some state assets could be seen as a catalyst for growing the market depth and liquidity to a point where other investors and companies come back to the public markets and provide capital for smaller growth companies.

    That’s another reason.

    Comment by leon — January 28, 2011 @ 2:41 pm

  8. For all that the Nats and other pro-privatisation folks are incoherent on this topic, Labour are worse. In one breath they’re howling about how the country doesn’t want privatisation (possibly true) and issuing press releases which say privatisation is a bid to cling to power (perhaps also true, but 100% inconsistent with the first argument).

    So which is it, again?

    L

    Comment by Lew — January 28, 2011 @ 2:42 pm

  9. Poor old Labour. Give them time. They’ve only been warning the public against asset sales for ELEVEN YEARS, so they need some room to formulate their strategy.

    Comment by danylmc — January 28, 2011 @ 2:54 pm

  10. In my view, there’s hardly a “battle of ideas” coming from National and Labour on the issue. As Lew illustrates, Labour is scrambling to just find any old argument to throw around against the proposals and some of these are rather inconsistent.

    Likewise on National’s part their proposal is pretty half-hearted and lacking conviction. Their whole “mixed ownership” model isn’t really something that they believe in but is just a compromise because National doesn’t have confidence in its ability to be able to convince anyone of a proper full privatisation proposal (which is what they would prefer). And they haven’t even got the guts to look at other businesses like NZ Post and TVNZ. The funny thing is – although perhaps not – is that most of the public probably didn’t even realise that the government owned businesses like Mighty River or Genesis.

    Danyl – can you elaborate on why your thinking about infrastructural assets needing to be owned by the state (keeping in mind that the government has a total arms-length relationship to them, just collecting dividends)? I could definitely see your point if you were talking about Transpower (which runs the actual power grid) which has never been considered for sale. But I would have thought that if one favours owning purely profit-oriented enterprises like Genesis, then you’d also want other “infrastructure” enterprises like Telecom – or even the BNZ – to be taken back onto the public books

    Comment by Bryce Edwards — January 28, 2011 @ 2:59 pm

  11. You thought Labour were terrible before? Here’s Damien O’Connor!

    Comment by danylmc — January 28, 2011 @ 3:03 pm

  12. Some interesting points here. Bryce, that was a useful contribution. My concern is that the “average” voter won’t take the time or have the desire to try to understand some of the nuances. They see “asset sales” and have an emotive response, usually negative. I look at the gov’t keeping a majority stake and floating the rest of the shares as one way to allow these SOE’s to grow and expand. I just wish KiwiBank had been on the list. I wouldn’t mind owning some shares in my bank. :)

    I think the ultimate success or failure will depend on how the ideas, on both sides, are presented. Labour is not lily-white on the issue, but whether that ends up being a problem remains to be seen.

    Comment by David in Chch — January 28, 2011 @ 3:51 pm

  13. Its often argued that since the SOEs are effectively run as profit maximising entities, they should be regarded as effectively privatised anyway. Their partial sale would only formalise this arrangement. Increases in electricity prices over the term of the fifth labour government are pointed to in support of this.

    But that is somewhat simplistic. If at some point the government, as 100% shareholder, decides that reform is needed (such as imposing an ETS on generators, or amending the RMA to make it harder to build power stations) that reduces the value of these investments, there are no aggrieved shareholders. This residual power is heavily diluted when there is (even partial) private ownership. If the reform has an adverse effect on the enterprises share price, a chorus of people will claim that the government is stealing the property rights of private property holders. Scared that this outrage would deter foreign investment, the government would be much more reluctant to exercise its sovereignty.

    So for me, one benefit of retaining 100% government ownership of these strategic assets is that it strengthens the governments sovereign ability to make changes in those industries in the future, if it deems doing so appropriate.

    Comment by DT — January 28, 2011 @ 3:56 pm

  14. DT – that’s a good argument.

    If I understand it correctly, you’re saying that the state should own a business so that if it wants to regulate in that particular sector in a way that might result in reduced profits for a business then it can more easily do so because the reduced profits will only mean a reduced dividend to the taxpayer.

    Two answers immediately arise in terms of your hypothetical argument: 1) The state is just as likely to financially compensate a business in any sector when there is some sort of necessary regulation. For example, think of the ETS and the compensation to iwi forestry etc. Again this type of compensation is a drain on the taxpayer, just as it is when an SOE takes the reduced dividend hit as a result of such regulation. 2) In the energy sector, the state only owns some of the businesses, so does your argument mean that the state should buy up the other companies too?

    Comment by Bryce Edwards — January 28, 2011 @ 4:08 pm

  15. Thank you Bryce.

    I think that compensation (while theoretically attractive) isn’t that realistic. The ‘robbed’ firm will kick up a public fuss unless they are over-compensated. That leaves the reforming government in a difficult position – to pay too much or be publicly criticised by a well moneyed utility? They end up just not taking the reforming action.

    In energy generation, private owners are Contact and a few smaller ones. I guess it is easier to deal with one well-moneyed utility than many. I don’t support re-nationalising Contact energy, but don’t agree with its privatisation in 1999.

    Comment by DT — January 28, 2011 @ 4:20 pm

  16. Yep, there’s some logic in that, DT. I’ll ponder your argument some more – but I’m not really convinced yet.

    I’m also wondering if your argument applies only to certain sectors such as electricity generation, and thus whether there are other industries you feel the same about (banking, insurance, transport, dairying, telecommunications, media, manufacturing, etc?), or just the whole economy? At the moment I can’t quite see why you’d apply this argument only to the electricity generating sector.

    And just to be clear, my whole argument is generally in favour of de-corporatising SOEs rather than retaining them or selling them. I think that the state should only own electricity generators in order to provide a social good, not make profits. But I’ll blog about that separately in the future rather than take over this blog discussion. Sorry Danyl!

    Comment by Bryce Edwards — January 28, 2011 @ 4:32 pm

  17. The position of Labour on state assets is hopelessly confused for example see Cunliffee on PPPs http://cunliffe.co.nz/?p=582, in reality how is that position any different to a partial sale? or any other situation where the government closes down a school, hospital or any other asset – heck even changing the parliamentary computer system fits into this position. It wouldn’t be too off the mark on this occassion of saying Labour is acting as a demagogue http://en.wikipedia.org/wiki/Demagogy . I acknowledge that is a big statement to make, but its based on labour having contradictory positions on assets and simply playing to “fear of the stranger”. Tylor Cowen at Marginal Revolution looks at this in the post “why do we care so much about sovereignty? http://www.marginalrevolution.com/marginalrevolution/2011/01/why-do-we-care-so-much-about-sovereignty.html#comments

    National has not been good at fronting the debate, although the PM maybe relying on other commentators to make the position and providing him space, but given this could be a defining feature of the election it seems like a risky strategy. Without getting into name calling Roger Kerr has a posting on the pivatisation debate which provides some links to arguments/evidence for privatisation/partial privatisation http://rogerkerr.wordpress.com/2011/01/17/privatisation-debate-should-be-rigorous/

    On what is a strategic asset the ISCR has a short paper that is useful reading http://www.iscr.org.nz/f615,17588/17588_StrategopolyFINAL.pdf which might help people in seperating out the question of is it strategic control that your after or asset ownership for teh sake of asset ownership. I think the control issue relates closely to the questions being asked by Bryce.

    A debate about Strategic control makes more sense to me than the current debate about which computers/cars/power company/airline the government should own.

    Comment by WH — January 28, 2011 @ 4:47 pm

  18. Whether a given firm should or shouldn’t be in state ownership is down to your politics. But assumptions about the efficiency or otherwise of state owned firms should not be part of the argument. What is more important is the context in which the firm operates, and whether ithe market supports inefficient monopolistic behaviour

    Comment by Dr Foster — January 28, 2011 @ 5:29 pm

  19. Maybe they decided to drop it early so it wouldn’t be a live issue right at the end of the election? at least now Duncan Garner (if he can take any time off from Chris Carter) won’t be runninga fter them sayin g”Will you sell assets, yes or no?” for the next 11 months.

    Comment by LucyJH — January 28, 2011 @ 5:56 pm

  20. A similar argument to DTs, is that while even if the SOEs are being run as solely profit-driven entities, they are still completely owned by the state. Which means that if a future government decided to de-corporatise them (as you suggested), the government is able to do so without having to buy them back off the private owners (who could potentially fetch a premium, as they are essential services). But in the mean time, even if they are being run as profit-driven, at least to money they make goes back to the government, and helps reduce our taxes, making the ‘extra’ profit they make merely a different form of taxation. In other words, as long as they are state owned and remain so, they manner in which they are run is a purely political decision that can be decided by the government of the day. As soon as they become partly privately owned, things get complicated in that you have to take into account the private owners as well.

    Comment by wtl — January 28, 2011 @ 6:12 pm

  21. that comment was directed at Bryce, btw

    Comment by wtl — January 28, 2011 @ 6:16 pm

  22. In other words, as long as they are state owned and remain so, they manner in which they are run is a purely political decision that can be decided by the government of the day. As soon as they become partly privately owned, things get complicated in that you have to take into account the private owners as well.

    Exactly.

    Which is why, to my mind, arguments explaining why Labour’s opposition to any sale is worthless because there isn’t really much difference who owns the corporatised asset pretty much miss the point. And it doesn’t really matter how correct those arguments might be. The thing is, the nats want to sell them, soon. That’ll be a shit bed that will be hard to unshit. The Labour party wants to not sell them.

    Given that, it doesn’t really matter if you disagree with how Labour would, or has, run them. If your preferred option for how they should be run includes something like state ownership, then right now, undermining labour is not going to get you anywhere you’d like to be, I would think.

    Comment by Pascal's bookie — January 28, 2011 @ 6:26 pm

  23. Hi wtl – the argument about the dividends of SOEs being used for reducing taxes etc is essentially the same argument that John Key uses for selling them – he says the proceeds will be used for education, health, preventing a need for more borrowing or tax increases. In a very basic sense, the price received from assets sales is commensurate with the likely future dividend payouts. So either way the money from the dividends or the sale goes into state’s coffers. So from a fiscal point of view, I’m not sure it makes much difference either way. Either you “cash up” the assets and get a bit whack of money, or you get a ongoing dividend. (Unless of course you argue that National will sell them too cheaply, a la Labour in the 1980s). What’s more, if that’s your argument, then again, to be consistent you should argue for the state to obtain many more businesses in order to provide such investment income to keep taxes low.

    In terms of whether SOEs can in the future become non-SOES owned by the state (i.e. de-corporatised) I’d suggest this misunderstand the whole corporatisation process. Corporatisation was configured to be a stepping stone *towards* privatisation, not the other way around. Furthermore, de-corporatisation is something that both Labour and National are strongly opposed to, so it’s hard to see this as a realistic option. The Labour Party in particular is strongly wedding to their 1986 State Owned Enterprises Act. They’ve never shown any inclination in the slightest to repeal it or apologise for it. Remember, Labour has just been in government for three whole terms during which they were supposedly turning back neoliberalism under very favourable economic conditions, but they never once looked at de-corporatisation. If anything, Labour turned the screws tighter on the SOEs pressuring the electricity companies and even TVNZ to return higher dividends.

    In contrast, the traditional socialist answer is to nationalise private businesses! I think that’s probably a more honest and realistic line to take on businesses that the left feel should be delivering some kind of social good. (And I don’t mean the Labour Party’s version of nationalisation a la the railways/Kiwirail whereby they go and offer the private owners twice the market value, using taxpayer funds, just in a nationalist bid to stay in power). Socialists normally nationalise business either without compensation (!) or at a government-determined price.

    But anyhow, despite all these arguments, I’m not actually arguing in favour of privatisation!! I’m just saying that we shouldn’t kid ourselves that it makes a difference who owns public utilities if their sole purpose is to return a profit to the controlling shareholder (whether it is the Crown or some offshore hedge fund).

    Comment by Bryce Edwards — January 28, 2011 @ 6:32 pm

  24. Missing in all of this (IMO) is why the state owns stuff. Its easy to see why the Govt had a Lands and Survey Dept that developed tough country for agriculture in earlier years..less easy to see why it continues with a corporation with developed assets earning 1%. Or power generation in early years before regions and private companies could do the job or forests before radiata pine became established as an internationally marketable commodity.

    To my mind the imperative is for govt to get these things going in a young nation and then get out of them once they are established, and move on to other new things of developing importance.. I can see no point in govt owning things that the private sector can provide at the same monopolistic price, but with the potential for competition to come in and lower the price.

    Agriculture, energy, minerals, research and development, communications etc.. there are no overarching reasons for Govt to “own” them.. but maybe a reason to “control” aspects them in some situations.

    JC

    Comment by JC — January 28, 2011 @ 8:41 pm

  25. C’mon everyone.
    Last election National promised no shocks, in their first term.

    Depending where one sits in the national demographic that is possibly debatable.

    Such a statement clearly carries the threat of look out next time, when we win again.

    There will be a next term, the result will be interesting. Either way.

    Comment by peterlepaysan — January 28, 2011 @ 10:33 pm

  26. Mr Cameron, principal of investment bank Cameron partners, has been a key figure in the SOE debate for years, most recently chairing the Labour government-sponsored Capital Markets Development Taskforce.

    When it reported in December 2009, one of the taskforce’s key recommendations was the partial listing of SOEs and its arguments drew a direct link between the health of investment markets and the New Zealand economy.

    http://www.stuff.co.nz/business/4595769/Key-gambles-on-privatisation

    “Labour government-sponsored” – the Clark/Cullen Labour govt that is. Goff/Cunliffe have other ideas, now. I tend to have a greater respect for Clark/Cullen.

    Comment by NeilM — January 29, 2011 @ 10:17 am

  27. .But assumptions about the efficiency or otherwise of state owned firms should not be part of the argument?

    Comment by multfilms online — January 29, 2011 @ 1:01 pm

  28. As far as I can tell, the useful pro arguments would be something along the lines of:
    - we can only own so many assets and there’s other more important things we want to put some cash into. But we still want to be the people in control of the business so we retain a majority shareholding.
    - deep capital markets are important for the economic development of a country and ours need a kickstart. Therefore rather than everyone owning these jointly via Government, we’re going to list them to help provide that kickstart.

    Note there are massive arguments against both those, but they should probably be the pro arguments.

    Comment by garethw — January 29, 2011 @ 3:37 pm

  29. “But anyhow, despite all these arguments, I’m not actually arguing in favour of privatisation!! I’m just saying that we shouldn’t kid ourselves that it makes a difference who owns public utilities if their sole purpose is to return a profit to the controlling shareholder (whether it is the Crown or some offshore hedge fund)”

    I suppose this is where that arguement starts to wear a little thin as it presupposes that due to a corporate structure the sole motive of an SOE is pure profit, and the interests of a nation state and a private company are equivalent. I don’t know if the fact that electricity prices have increased has provided proof of this motive so far.

    Comment by Anthony C — January 29, 2011 @ 3:44 pm

  30. Gareth @ 27

    Putting some big and decent stuff into a starved stockmarket, and enticing Kiwisaver investments into same instead of being invested in another country’s infrastructure also look better to me.

    JC

    Comment by JC — January 29, 2011 @ 5:39 pm

  31. Putting some big and decent stuff into a starved stockmarket, and enticing Kiwisaver investments into same instead of being invested in another country’s infrastructure also look better to me.

    I bet that was one option Cullen thought would come out of the taskforce he set up.

    No one outside pf the ever decreasing circles of ACT believe SOEs are there solely for profit. Labour and National understand the broader social and economic effects they have, with a slightly different emphasis of course.

    National might just do better with geothermal energy than Labour. Things are going on and Labour made a bit of a mistake back in 2006.

    Comment by NeilM — January 29, 2011 @ 6:57 pm

  32. it presupposes that due to a corporate structure the sole motive of an SOE is pure profit

    Anthony C, the motives of SOEs are defined by statute:

    The principal objective of every State enterprise shall be to operate as a successful business and, to this end, to be—

    (a) as profitable and efficient as comparable businesses that are not owned by the Crown; and

    (b) a good employer; and

    (c) an organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so.

    -State-Owned Enterprises Act 1986

    Comment by derp de derp — January 31, 2011 @ 6:52 pm


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