Public ownership is not as important as public control.
Listener: 26 January, 2008.
Keywords: Business & Finance;
Forty years ago Arnold Nordmeyer, then leader of the Labour Opposition, asked a group of students whether they wanted to nationalise corner dairies. His question has haunted me ever since. We don’t want publicly owned dairies, we don’t want a privatised Treasury – what determines the line that divides the private sector from the public sector?
I realised early that the issue was not really about public ownership. What matters is public control: does the business do what society wants? Where there is pure competition, regulation by the market can be as good as it gets; where there is a monopoly, public ownership is one means of public control, although how the ownership control is wielded is more important.
Sometimes a private monopoly under rigorous regulation will give a better outcome. Sometimes production can be a combination of public and private supply. That was the idea behind public-private partnerships (PPPs) where the private sector provided the capital (say, a school or hospital) that the public sector used. I may be seeing biased samples, but whether they come from Australia, the UK or the US, many of these arrangements have been a financial disaster to the public purse because the risks were stacked against it. Too often the private provider had little incentive to minimise that risk.
Unfortunately the pro-privatisation side of the debate is dominated by business advocates, or their acolytes, who are the beneficiaries of the transfer from the public sector. They claim that privatisation generates greater efficiency, but there is surprisingly little evidence of this. An OECD survey concluded that the efficiency gains came from corporatisation when the government tightened up the running of the public enterprise.
Gains from selling such businesses were much less clear. If there are no national gains from the privatisation, the considerable private profits are made at the public expense of inferior services, higher prices and running down the capital asset. That is what happened in the 1980s and 1990s. Not a few of today’s millionaires were the beneficiaries.
As for the theory that private businesses are more efficient than corporatised public enterprises because their managers are under greater pressure from the threat of a sharemarket takeover, it has no adequate empirical underpinning. Recently, one of its proponents, Michael Jensen, seems to have backed down, because firms behaved differently when his theories were put to the test.
That does not mean we should never privatise. Some of the privatisations in the 1980s reflected the practical assessment that some businesses were on the wrong side of a pragmatically drawn line between the public and private sectors. There is little point keeping an enterprise public if it is in a highly competitive market.
New circumstances change the balance. I advocate tradeable quotas for water, which is a kind of privatisation. My conclusion reflects a careful assessment of their advantages and disadvantages. If there is going to be a world shortage of water, it makes sense to manage ours through a regulated competitive market.
But I am far from convinced that breaking up the public Accident Compensation Corporation monopoly into private competitive supply will prove beneficial to accident victims. Competition works where there are particular market conditions. They don’t seem to apply here, or in some other areas such as education and health care. I cannot see how a television system dominated by advertising revenue can effectively serve its audiences.
Sometimes any small gains hardly justify the turmoil generated by the privatisation or the nationalisation. Yet the transfer involves substantial fees to some of the transactors, who become another self-interested lobby.
General privatisation is not a policy. It is a substitute for a policy, an excuse to dole out generous returns to one’s friends at the expense of the public. Nordy, were he alive today, would be as bemused by the rhetoric of privatisation as he was about the rhetoric of nationalisation 40 years ago.
Those students might be forgiven for being idealists, innocent of tough economic analysis. Today’s advocates are driven more by self-interest. Their public spiritedness is laced with greed. If there is a P-word that matters, it is not privatisation but pragmatism.