Monday, 21 November 2011

Oh dear ... the Standard on privatisation

Ben Clark writing at the Standard says
There are so many arguments against asset sales:

The fact that even Bill English thinks that they may raise less than $5 billion – when last year’s deficit was $18 billion – shows how quickly the money raised will disappear, leaving us without the income stream or the cash.
As I have noted before, I don't know how many times, the amount of money raised by privatisation isn't the issue. Let the debate about privatisation be in terms of efficiency, not price. Also note that an income stream along way in the future is worth a close approximation zero in present value terms so even if you do "lose it" you don't lose much. But assuming a competitive method of sale, the price received by the government for a asset will equal the present value of the revenue stream. In addition you don't lose all the stream anyway since tax is paid on the profits made by the new owners of the asset and we gain by making more efficient use of resources given that on average over time private firms out perform public ones. Also a competitive sale process it will capture some of these likely efficiency gains.
The fact that the only “Mums and Dads” able to afford to buy shares of assets we already own will be the top 1 or 2% – ensuring another National transfer of wealth from all of us to the richest in the country.
As to the idea that "we already own" these assets, we don't. The taxpayers or the "public" do not own government assets in any meaningful sense of the word "ownership". All of the attributes of ownership, such as control, the right to determine what use is made of it and under what conditions, is determined by the government or the bureaucracy in control of the asset in question.

The important point here is that without control you don't have ownership. 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.))
Clearly the "public" does not have the rights Holmes refers to. The government (or its bureaucracy) has these rights. Following Grossman and Hart ("The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", 'Journal of Political Economy', 94:691-719) economist's tend to define the owner of an asset as the one who has residual rights of control over the asset; that is, whoever can determine what is done with the asset: how it is used, by whom it is used, when they can use it etc - note that ownership is not defined in terms of income rights. Under "public" ownership it isn't the "public" who has the control rights, its the government. The "public" can not determine what use is made of a "public" asset, rather its use is determined by the politicians and managers in command of it. As Madsen Pirie has noted
The term 'public ownership' is a misnomer. The state sector may have the name of the public filled in on the dotted line, but the public do not own it in any meaningful sense of the word. All of the attributes of ownership, such as control, the right to determine what use is made of it and under what conditions, is determined by the bureaucracy in command of it. Far from being owned by the public, it is owned in effect by the people who administer it. The public actually has more influence, via its choices and purchasing decisions, on private sector businesses than it can ever have over state industries and services. In those cases its influence is diffuse and diluted through the political process.
Just think of any of the SOEs in New Zealand, what control does the "public" have over them? Control rests with either the government or the bureaucracy or the firm's managers. The taxpayers have the least say of anyone in their running.

If you are worried about the amount of money raised, as Clark is in the first point above, selling to all "Mum and Dads" is a bad idea as this will result in a lower price being received. A sale of shares in general will result in underpricing.
The fact that those uber-wealthy “Mums and Dads” will inevitably sell off their shares for a quick buck to foreign owners, as they did with Contact Energy, meaning a much worse balance of payments as those profits head offshore – growing other countries’ economies, not ours.
A good bit of xenophobia. Also note the selling of the shares will have no effect on the balance of payments given that the BoP is always zero by construction. Also note that if profits are heading overseas this means that good and services must have already been produced here in New Zealand to give rise to the profits in the first place. This production of goods and services means our economy has grown.
The fact that those foreign owners will have no motive to protect and improve our vitally important electricity supply, only to rake as much wealth out of us as they can.
As I have noted before an SOE, New Zealand owned firm and a foreign owned firm will all act in the some way, i.e. maximise profits, so the performance of firm does not depend on the nationality of the owner. Is this just more capital xenophobia from the Standard?

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