Scoop Link: Issues in Privatisation – Costs & Benefits

Thursday, 3 February 2011, 1:44 pm
Opinion: Scoop Link

This is the text of a seminar paper delivered on 6 October. You can Download a PDF or the Slides.

New Zealand has had an appalling experience of privatisations. The sale of New Zealand Rail and Air New Zealand went so wrong that renationalisation was an imperative. Among the others there was the abject failure of Telecom to develop our telecommunications system despite monopoly profits, most of which went overseas with little reinvestment, the handover of our banking system to the Australian banks through the sale of the Trustee Savings Banks, the Bank of New Zealand and Postbank, only marginally remedied to date by the creation of Kiwibank; the scandalous bargain price sale of the Government Printing Office to kick start the empire of New Zealand and Australasia's wealthiest man, Graeme Hart; continuing dysfunction in the partially privatised electricity system which created blackouts, huge price increases, inadequate investment and still fails to provide reasonably priced and secure power; conferral of duopoly status in commercial radio through the sale of Radio New Zealand's commercial stations; the loss of huge potential for further processing in the sale of forestry cutting rights; and Housing Corporation mortgagees feeling defrauded when their mortgages were sold to private financiers.

To give just two examples of the effect on New Zealand's liabilities: the Ameritech/Bell Atlantic/Fay, Richwhite, Gibbs,Farmer syndicate bought Telecom for $4.25 billion in July 1990, when the company had shareholder funds of $2.5 billion. Shareholder funds declined over the next several years despite cost-cutting because of large capital payments to its shareholders who walked out of the company from 1997 with a realised capital profit of $7.2billion, in addition to a share of over $4.2 billion in dividends[i]– adding approximately $10 billion to New Zealand's international liabilities. Between1990 and 1998 the company's shareholder funds halved to $1.1 billion by when it was heavily in debt. In the decade from 1995 to 2004, Telecom paid out dividends of $6.7 billion from net earnings declared in New Zealand of $5.4billion, of which approximately $5.0 billion went overseas[ii].

The New Zealand Rail sale in 1993 was organised by Faye Richwhite who then proceeded to benefit from it hugely by taking a substantial shareholding – a conflict of interest fit for a post-Soviet state. The main shareholders of the purchaser, TranzRail, were Faye Richwhite, Berkshire Fund and Wisconsin Central of the US, and Alex van Heeren. They bought a company which had been freed of debt by a $1.6 billion injection by the government. The price was $328 million, of which they paid only $107 million and borrowed the rest.According to Brian Gaynor they "were responsible for stripping out $220.9million of equity in 1993 and $100 million in 1995"[iii].By the time they had sold out, they had made total profits of $370 million,mainly tax free because of the lack of capital gains tax, and darkened by accusations of insider trading[iv]. Under Wisconsin's management the safety record was appalling (by 2000, fatal accidents for employees were eight times the national average) and reinvestment and maintenance were abysmal, leaving the operation in a crippled state. They sold out to Toll of Australia who similarly failed to maintain the system, and who then sold it back to the government in two tranches for a total of over $700million plus ongoing costs to the government of several hundred million dollars to repair the rail network and replace the antiquated rolling stock. It is difficult to estimate the total costs to the country, but the total cost to the government will be almost $4 billion[v], greatly magnified by the neglect of the private owners.

The previous government has been accused of paying too much for the rail company, and they probably did, but that was just one element of the huge financial and opportunity losses to the people of New Zealand as a result of the privatisation that were evident well before the renationalisation. The story starkly illustrates the difficulty and cost in reversing privatisation once committed.

The reason for this seminar is undoubtedly that there is concern that we will soon embark on the next wave of privatisation. In my contribution I will first cover what forms privatisation might take, and what distinguishes privatisation. Privatisation is not simply, or even mostly about better services or efficiency. I'll cover a little of the background and how a bias towards privatisation is embedded in government financial rules and accounting systems. Finally, is a strong lobby advocating for privatisation and I will briefly look at who benefits.

What is privatisation?

Because of the deserved unpopularity of privatisation, undoubtedly if privatisation is allowed to happen, this time round it will take a different form. The most publicly discussed is partial sale of remaining state-owned enterprises (SOEs), and Private-Public Partnerships are already under way for schools and prisons. But in fact it could take a wide range of forms. E.S. Savas, who accurately describes himself as an "internationally known pioneer in and authority on privatization"[vi] served in the Reagan Administration, and advised on privatisation in the US and the UK, defines privatization as "reducing the role of government or increasing the role of the other institutions of society in producing goods and services and in owning property"[vii].

Within this wide definition, there is a great variety of privatisation techniques of which the sale of a state function is just one example. Sue Newberry, Associate Professor in Accounting at University of Sydney and expatriate New Zealander, has studied the embedding of such techniques in the financial rules created by the New Zealand Treasury. She quotes Savas to list the techniques. They include complete divestment by sale,donation or liquidation; delegation (limiting the activities of government) by contract, franchise, grant, voucher, mandate, user charges, PPPs; and passive techniques such as load-shedding, default, withdrawal or deregulation[viii].The terminology changes to escape the negative associations with terms as they become unpopular. We are unlikely to be told that a government is privatising its responsibilities or assets – more likely that it is increasing competition,increasing choice, increasing innovation, devolving responsibilities to the community, producing value for money or strengthening capital markets.

ENDS

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