The Price Of Privatisation

Are public-private partnerships the next problem?

Listener: 2 December, 2006.

Keywords:  Business & Finance

At the launch of Treasury veteran Richard Shallcrass’s memoir Family Silver, David Caygill, who had been one of Shallcrass’s Finance Ministers, rejected the suggestion in David Lange’s autobiography that there might have been corruption in the privatising of state assets. Shallcrass, who was involved in selling nine of the major ones – six of the book’s chapters describe the sales – said he knew of no corruption either.
In My Life, Lange writes that “the process by which sales were made was a debacle to put it mildly. The rush to sell was nothing more than bloody-mindedness. If the process was not corrupt, it was certainly open to corruption, or the appearance of corruption. Ministers were too close to the sales process and in some cases too close to prospective purchasers.”
Shallcrass’s book nicely captures the excitement of those days. He and other officials implemented the government’s policy direction as best they could. There is almost enough material in the book for you to judge whether the politicians were too close to the selling. I also leave you to ponder why a Prime Minister who had such doubts apparently did little to deal with them. In fairness, Lange relates how later, as minister in charge, he refused to sign the agreement to sell the Government Printing Office because he thought it “extraordinarily generous”; another minister signed it.
A subsequent inquiry by a parliamentary select committee found the sales process had been very unsatisfactory (but there was no evidence of corruption). The sale to Graeme Hart’s Rank Group helped propel Hart to billionaire status.
Shallcrass (who was not involved in that asset sale) does not systematically set out the reasons for the privatisation. That was a ministerial decision taken on others’ advice. He says that a couple of his colleagues expressed “reservations that were based, I assumed, on ideological considerations”. Does that mean no economic reservations were expressed in the Treasury?
How do the privatisations appear with hindsight? Some were successful; some were disasters. We have had to re-nationalise the rail track and most of Air New Zealand. Kiwibank was set up to fill the gap left by the sale of the Post Office Savings Bank. In the rush to sell Telecom, the regulatory framework was ignored, and we have spent 16 years trying to unscramble the mess, with legislation currently before Parliament having yet another go.
Had the assets stayed in government hands their management might have been even worse, although that is not obvious from the performance of existing state-owned enterprises. A future government could mismanage them, but then again a future government could get into rushed botched privatisations. We have had both in recent decades.
Not that there are a lot of commercial assets left to sell. The bigger danger is public-private partnerships (PPPs), in which the private sector leases to the government assets (which in most cases they have built) such as hospitals. This gets the investment off the public books but, since no private agency will risk a large capital sum on the vagaries of government decisions, it requires guarantees that are, in effect, public liabilities.
The overseas experience is that it is very hard to get the right balance of public benefit and liability in PPP investments. Foreign governments have been taken to the cleaners, with outcomes far more favourable to the private sector than, say, the sales of the Government Printing Office and Telecom. That has not been true in every case, however, and PPPs can be a useful addition to public investment management. Moreover, unlike the reported foreign examples, our government accounting procedures would flag the guarantees as possible liabilities rather than ignoring them.
Such practices were put in place because of earlier New Zealand PPPs. The Think Big energy investments involved the private sector investing billions of dollars with government guarantees that protected their return. But we were not told about them at the time, and when they went wrong we – taxpayers and motorists – paid. We paid again with poor-quality privatisations. Hopefully we won’t with PPPs.