Saturday, 23 February 2013

Moral hazard and SOEs

From the TVNZ website comes this comment:
Any Government bailout of beleaguered state-owned coalminer Solid Energy must not further devastate already struggling mining communities, the Engineering, Printing and Manufacturing Union (EPMU) says.
I can't help thinking that the correct comment would have been to say there should be no "bailout of beleaguered state-owned coalminer Solid Energy". One of the problems with SOEs is exactly the issue of bailouts. The fact that the bailout option is there crates a moral hazard problem since management know the government will bail them out if their plans don't work and thus they take more risk than a private company would. The correct response by the government would be to let Solid Energy go bankrupt if it can't workout a deal with its creditors.

The TVNZ article continues,
Labour's state-owned enterprises spokesman, Clayton Cosgrove, said National's "epic mismanagement" had turned it from an export-award-winning company into a basket-case.

"Solid Energy appears on the verge of collapse. This must be the first time any government has overseen such a massive failure in a state-owned asset . . . The big loser? Yet again, the taxpayer."
Yes indeed. One advantage of (full) privatisation is that it will depoliticise the firm. It will increase the political cost of the bailout option and thus reduce - as much as possible - the likelihood of a bailout. The aim of privatisation is to have the greatest possible "distance" between the government and the firm. Government interference in the running of a firm is impossible to eliminate completely but a good privatisation plan will result in a situation where any government interference is as obvious and politically costly as possible. But I'm guessing privatisation isn't what Cosgrove has in mind :-(

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