Sunday, 13 May 2012

Another thing (partial) privatisation isn't about

Rob Cameron writes in the New Zealand Herald,
And therein lies New Zealand's problem. The analysis of the Taskforce clearly showed our publicly listed markets lack depth, breadth and, by any standards, are just too small. In Australia just under 80 per cent of the largest 200 companies are listed on the ASX. In New Zealand less than one third of our largest 200 companies are listed.

Measured relative to GDP, the NZX is among the smallest in the developed world. As a ratio of GDP, the market capitalisation of our stock exchange is 0.35. This compares with Australia, at 1.37, Britain at 1.40 and the Nordic countries which vary between 0.85 and 1.30. You have to go searching for former communist countries (such as Hungary) to find ratios as low as ours.

Our sharemarket also exhibits significant "gaps". Sectors such as utilities, which contain a significant number of large and mature companies, are owned by central government or local authorities which choose not to list and make available for public ownership minority interests in these entities. In this respect New Zealand is an "outlier" within the OECD.

A disproportionate share of our large companies are owned by central or local government, and a relatively small number of these companies have minority public ownership, compared to most other OECD countries. This probably contributes to low household participation in our equity market.

The Government's mixed ownership programme has the potential to significantly change this picture. It would increase the size of our stockmarket by more than 20 per cent, significantly improving its depth, attractiveness and effectiveness as an engine of growth. It would provide retail investors with a much-improved choice of good quality investment products.
The New Zealand sharemarket may exhibit significant "gaps" but so what? Filling "gaps" in the sharemarket is another thing privatisation isn't about. It is not the job of government to bolster the sharemarket, that is the job of the those who run the sharemarket.

Let me say again, the debate about privatisation should be in about the efficiency of the economy, not about price or "lost dividends" or the state of the sharemarket. The sharemarket, I'm sure, would do well if the government sold off SOEs as legal monopolies but it's hard to see this as an efficiency or welfare enhancing move. If privatisation helps the sharemarket, great, but this result in a positive externality of privatisation, it is not in and of itself a reason to privatise.

1 comment:

Talo said...

I think you're missing his point. Rob Cameron sees larger sharemarket as supporting economic efficiency. The story would go something like this:
-as more large companies list on the sharemarket, more people will see investing in shares as a better way of saving compared to savings accounts etc.
- this increases the demand for shares, lowering businesses cost of capital and leading to greater investment and more entrepreneurship.

Is that story correct? Maybe not, but I think you've completely ignored it.