Over at the (ever lower)
Standard Marty G has gone into comedy mode and has written
The weak neolib defence of asset sales as a counter to my previous posting
Privatisation: the "facts". Read Marty's piece, but please don't laugh too loudly as you may disturb others.
For a start I didn't offer a "defence of National’s privatisation agenda" since from what I have heard of it there are a number of things I would say are wrong with it, partial sales for example. And what exactly is "neo-liberalism"? Is this just Marty's name for good economics?
I said
Actually no we don’t [own the SOEs]. The government does. The government has the residual control rights over these assets and thus they own them.
Marty said
In the neoliberal mind, the government isn’t an expression of society’s collective will and cooperation, it’s a business. You and I know that what the government owns it owns on our behalf. The privatisers see a business to be asset-stripped.
Well the "government isn’t an expression of society’s collective will and cooperation" so he right about that, but it also isn't a "business". Even the left-wingers like Paul Krugman has worked this out. See his article,
A Country Is Not a Company, in which he asks: Should politicians turn to business leaders for advice in formulating economic policy? And he answers no as countries are not companies.
Anyway, none of this has anything to do with my point, which is very simple: we the people do not have residual control rights over state assets, the government does, and thus the government, and not we the people, is the owner of those assets. The question is about who has the rights of control over SOEs in all situations not contracted for, and the answer is the government and thus they are the owners. Marty does not address this basic point at all. As Oliver Wendell Holmes Jr. put it,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))
That is, the owner has residual control rights. For SOEs this owner is the government.
I said
They may not [end up owning privatised assets] but why should we worry? The idea of the sale of any asset is to get it in the hand of whoever values the asset most highly. That may or may not be “Mum and Dads”.
Marty said
Out comes the truth. The assets go to the people with money. Look closely: “whoever values the asset most highly”. Neoliberals equate value with money. Who values a loaf of bread more? A starving man with no money or a rich man who wants to sop up his soup? According the neoliberals, the one who will pay the most money. They don’t understand that an asset will be bought by the people with the most money even though others may value the asset more highly.
The point I was making is simply that if you want the owner of an asset to have the best incentives to use that asset efficiently then you want that asset in the hands of whoever values that asset most highly. Social welfare is maximised when we use our resources efficiently and thus we want assets allocated to those who will use them efficiently. This may be Mums and Dads, in which case they can buy and hold on to shares in a firm. If they choose to sell them to someone else, then it must be that the new owner values those shares more highly than the Mums and Dads and is thus willing to pay the Mums and Dads more than the Mums and Dads value those shares. Because, in short, trade is voluntary.
I said
“Privatisation harms markets”. I’m not sure that even make sense. I’m not sure how getting more firms into a market can “harm the market” – whatever that means. The evidence tells us that privatisation increases competition in markets and I can’t see how that “harms the market”.
Marty said
Oh dear. Who hear thinks the electricity market is working better now than it was when it was before the Bradford reforms that partially privatised it? The introduction of privatisation to natural monopolies has historically lead to under-investment and competition based on advertising, not quality and price.
Well actually the electricity market is doing better thanks to the Bradford reforms so Marty is wrong here. Also the electricity reforms had little to do with privatisation, so I don't get Marty's point. (For discussions of New Zealand's electricity markets see the postings by Seamus Hogan, who knows lots more about this than most people, on the topic over at
Offsetting Behaviour.)
I would like to see Marty's evidence for this assertion: "The introduction of privatisation to natural monopolies has historically lead to under-investment and competition based on advertising, not quality and price." The general point about privatisation in (near) monopoly markets is that the outcome is more dependent on the design and regulation of the market than on privatisation as such. The need to introduce competition and an effective regulatory regime emerges as key issue for markets such as these. (see William L. Megginson's book "The Financial Economics of Privatization", New York: Oxford University Press, 2005 for discussion.)
I said
"Privatisation leads to asset-stripping". It may or may not. In some cases that is exactly what should happen. In a number of cases, eg NZ Rail, the business as sold wasn’t viable and thus needed reorganisation. Privatisation is a good way of doing this.
Marty, for some reason, said
You read it here first (unless you’re one of the 6 people who read Anti-dismal): the Right supports asset-stripping. I love that they picked rail as an example of asset-stripping working. The fact is we got to the edge of losing a vital piece of national infrastructure which private owners had extracted huge profits from and then dumped back into the government’s hands, knowing it couldn’t let it collapse.
Now who exactly is "the right"?
The point about NZ Rail was that a lot of it was simply not economical viable, and as Kiwirail still isn't. In the July 2009 issue of
Competition and Regulation Times put out by the
New Zealand Institute for the Study of Competition and Regulation (ISCR) the question is asked,
Kiwirail: strategic asset or strategic blunder? The article summaries an ISCR research paper "
The history and future of rail in New Zealand" by Dave Heatley.
My view has, for awhile, been nearer the blunder end of the scale than the asset end. The Times article and the research paper argue along similar lines. Heatley opens his Times article by noting that back in 1999 one of the first projects undertaken by the ISCR was a study of the long-term economic performance of New Zealand railways.
Public rail ownership was characterised by declining performance, beginning in the 1920s and culminating in a very poor prognosis in the 1990s. There were signs that since 1993, privatisation had led to improved productivity and profitability; however, the business was still far from achieving financial sustainability. The ISCR report predicted that private-sector ownership would result in better incentives for productivity-enhancing decision making, but in the long run it was unlikely that in its current form the business would be able to generate returns sufficient to cover the costs of the very large sums of capital employed. Given these facts, a rational private owner would likely rationalise services and reduce the scale of the network to the point where it constituted a sustainable long-run business. Revenues freed up from repeated cycles of historic government-funded capital injections and operating subsidies could then be applied to more productive uses, to the wider benefit of the New Zealand economy.
Given that rail is again in the hands of the government it is timely to re-examine the assumption that government ownership will result in superior long-term outcomes for the long suffering taxpayer owners. Heatley writes,
The 2009 analysis reveals little evidence to suggest that overall the economic outlook for rail has improved since 1999. Despite gains in operational productivity, rail's share of the land freight task has declined over the period examined. Profitability has remained poor, suggesting an ongoing lack of competitiveness vis-a-vis other freight modes.
and continues
Rail networks offer benefits from economies of density (increasing use of existing tracks), but not necessarily from economies of size (increasing size of the network).' In a rail network with uneven patterns of use, such as New Zealand's, the economics of density means that the closure of lightly used lines will, in general, improve the overall economic performance of the network.
Importantly Heatley notes that
It proved difficult for private owners to rationalise the size of the network efficiently, due to poorly aligned incentives and political intervention in operational decisions such as exiting from the provision of certain long-distance passenger services.
The retention of land ownership by the Crown at the time of privatisation muted private incentives to rationalise the network as the private operator was unable to access the potential land-sale benefits from closing unprofitable lines. Private-sector owners have been incentivised to persevere with a strategy (originating under public ownership) of retaining otherwise uneconomic lines for their current income-generating potential, but refraining from investing in replacement infrastructure such as sleepers, tracks and bridges.
A return to integrated land, infrastructure and operational ownership resolves the incentive misalignment, enabling its new owners to rationalise network infrastructure efficiently. Yet perversely, extensive recapitalisation has followed re-nationalisation. The government has invested $2.9 billion in rail since 2002, and has committed a further $0.9 billion through to 2013. It is unlikely that the government will earn a reasonable financial return on this investment, as the strong incentives of private owners for ongoing productivity improvements will likely be muted under government ownership, and the scope for political intervention in strategic and operational activities has increased.
The consequences of political intervention are evidenced in the targets set for a modal shift from road to rail freight in the New Zealand Transport Strategy. Any increases in rail freight's share must ultimately come from substitution at the margins away from competing transport modes. Extensive competition from both road and sea freight restrains the ability of rail to set prices. Rail exhibits few apparent cost advantages, even with subsidies from the written-off opportunity cost of capital. So modal shift can only be driven by increasing the level of subsidies in order to lower prices artificially and therefore induce movement of marginal freight away from more efficient road and sea freight. Such shifts will be to the detriment of the overall economic performance of the transport sector and the wider New Zealand economy.
There is little evidence that the real costs of the current government ownership and investment strategy have been adequately assessed in terms of foregone benefits in other taxpayer-funded areas, such as health and education.
After this, an obvious question to ask is, Is there light at the end of the tunnel? Heatley comments,
The 2009 analysis confirms that the issues identified in 1999 still remain, and are unlikely to be addressed by recent changes in governance, ownership and policy direction. Yet rail still remains a viable transport medium for those segments to which it is intrinsically well-suited - long-haul carriage of heavy, bulky freight (coal, logs, manufactured goods, etc.) and high volume urban commuter services. The challenge for rail's new owners is to find a viable subset of the current rail network. Given current and projected freight and passenger types and volumes, it appears a viable subset exists at around 1500-2000 kilometres in length - less than half the present size. Line closures and land sales could fund upgrading of the core network to 21st-century standards.
So, rail makes sense for a small portion of the current network. However I can't see the changes in government policy and public perceptions need for rationalisation of the network coming to pass any time soon. So the taxpayer gets stuck with yet another white elephant.
I said
We also get a bad deal on SOE sales.” How can we tell? If this means we don’t get the highest price possible for an asset then why worry? The idea idea for asset sales isn’t to sell at the highest price, if it was then the government should make all SOE’s into monopolises before selling them as monopolises command a higher price than competitive firms. Even Marty G should be able to see the problem with that!!!!
Marty went on to say
OK. That’s a bit of a mad rant. Selling assets at a low price is a good thing? For whom? Oh, yeah, the rich buyers, like Fay and Richwhite who made half a billion dollars by buying government assets for fire-sale prices and hocking them off quick for more.
Selling assets at a low price is good? Yes it can be. If fact selling at a (almost) zero price can be a good thing! For example, Anbarci and Karaaslan put forward
An Efficient Privatization Mechanism:
In this paper, we consider the privatization of State-Owned Enterprises (SOEs) that are legal monopolies but not natural monopolies; their markets can be opened to competition once privatization takes place and other competitors can emerge and compete successfully against them in a few years. But until that happens, these privatized SOEs can have a significant level of market power. The currently used “Revenue Maximization (RM)” privatization scheme maximizes the government revenue from privatization but does not provide sufficient incentives for the privatized SOE eiher to charge a price lower than the monopoly price or to improve production efficiency until competition arises. We propose a new scheme to privatize such SOEs. We term this new scheme the “Welfare Maximization (WM)” scheme. The WM scheme practically yields no revenue to the government from the privatization of any such SOE; however, it induces the privatized SOE to charge a competitive price in the absence of any regulation. It also turns out that the WM scheme provides greater incentives for post-privatization process invention (i.e., for post-privatization cost reduction) than RM scheme. (emphasis added)
The point is that just trying to maximise the price received for an asset is not necessarily a good idea. In the above example welfare is maximised while revenue is basically zero. If revenue was the only concern, as it seems to be for Marty, then selling monopolies would be a good idea, as I pointed out before.
I said
Kiwibank doesn’t need to be partially sold to get money for expansion. The cheapest source of capital is the government” If this is true for Kiwibank then it is also true for all other firms and thus the government should supply the capital for all firms. To get capital allocated rationally you need the price of capital to be the market price so that it reflects the true opportunity cost of that capital.
Marty madly said
Anyone who thinks that capitalism succeeds in rationally allocating capital needs their head read. We’ve just gone through the largest recession in generations because of mis-allocation of capital. We’re on the brink of environmental collapse because we’re expending our capital on building SUVs rather than creating clean energy. The neolibs can’t actually counter my point – if Kiwibank needs more capital, the government is the best value supplier.
All of which has nothing to do with my point: If it is true that the government is the cheapest source of capital for Kiwibank then it is also true for all other firms and thus the government should supply the capital for all firms. What is so special about Kiwibank? Why does this business get cheap finance when others do not? Like I said, to get capital allocated rationally you need the price of capital to be the market price so that it reflects the true opportunity cost of that capital.
Marty has to explicitly explain why Kiwibank is different from all other businesses in New Zealand and thus needs government funds while all other businesses do not. Why is it that the opportunity cost of capital for Kiwibank is a lower government rate whereas the cost for all other business is a higher market rate?
And the government's record on allocating capital is far from good, remember Think Big? For the government to supply capital at a lower rate to Kiwibank gives that bank an advantage over other banks who must go to the capital markets for their funds. What would the Commerce Commission say about this?
Also, as an aside, the much of the mis-allocation of capital in the recent financial crisis was due to government actions, mainly in the US: keeping interest rate too low for too long, trying to push too many people into housing, altering the incentives that banks face for lending etc. Also it not clear that Marty's examples of mis-allocation are actually mis-allocations. If consumers like SUVs its not a mis-allocation of resources for producers to make them.