Don’t Privatise Without Regulation

Listener: 14 April, 2012.

Keywords: Business & Finance; Regulation & Taxation;

Last year, this column argued for the mixed-ownership model of some state-owned enterprises as a means of deepening the capital market for private savers. Even then, it argued that not all partial privatisations were sensible. It depends on the market structure and the way it is regulated. The lesson was ignored 20 years ago in the rush to sell off state trading assets. We still suffer the consequences.

The British took considerable trouble to prepare their privatisations, including paying attention to market regulation. The New Zealand Telecom privatisation bill was rushed through Parliament in the dead of night, without any consideration of the regulatory environment. For two decades the monopoly plundered consumers while the New Zealand tele communications sector fell behind the rest of the world. At last we have separated the network arm (Chorus) from the services arm (Tele com).

Meanwhile, commuters in some urban areas still suffer because the privatisation of public transport left a number of providers and no seamless transition between them. We still have not learnt. The proposal to partially privatise the state-owned electricity companies may be repeating the regulatory blunders. We have been fiddling with the industry structure over the past decade.

Last year Genesis took over the Tekapo power stations from Meridian, at the Government’s direction. The industry structure is hardly stable. A particular issue is the feed-in tariff to the grid by small suppliers – households, businesses, farmers – who produce renewable energy from wind generation, biomass and solar sources. New Zealand is behind other countries. Some argue that New Zealand seems very backward, that failing to set a mandatory tariff for feed-ins from small suppliers gives too much power to big producers.

Others argue that some countries subsidise their small suppliers at the expense of higher prices to consumers. We also seem to be a bit backward in smart metering, which will give households better control over their electricity usage (that is, lower overall prices), although widespread adoption of the metering may just be a matter of time. Why, then, go ahead with the partial privatisations when the sector remains in regulatory uncertainty? Why especially when it seems likely, according to the Treasury, that the sale prices will be too low to cover the loss of profits to the Government?

This is not an ideological Government, I think, although some will see the mixed-ownership model as a step towards full privatisation. However, like every government, this one is beholden to its political backers, which include the financial community that will be a beneficiary from the deals that go with the sale. Is the Government repeating the post-1987 strategy of supporting the business sector by hasty privatisations (except this time it is helping them not because of a sharemarket crash but because of the stagnation from the global financial crisis)?

As in the case of the Telecom privatisation, not all businesses will benefit. Some grumbled greatly – I would say, justifiably – over the high prices and poor service the botched privatisation generated. Something to be repeated? There is a danger that careless privatisation will fossilise the industry, as has already happened with the ports. Given the increasing size of ships and their need for deeper ports, structural change is inevitable. Co-ordination of the development is blocked because of the differing ownership of the ports of Auckland and Tauranga as a result of hasty privatisations.

Suppose we decide in a few years’ time that the electricity industry structure is still wrong. Partial private ownership would add to the rigidity of the structural change, as it has done with telecommunications and is doing with the ports and urban commuting. This time, the partial privatisation bill will go before a select committee of Parliament (thank you, MMP). There should be at least one report on the regulatory framework.

Until Parliament is satisfied about the market environment of the electricity sector (or that privatisation will not delay progressing it), the bill should not proceed. Margaret Thatcher was right: get the regulatory framework of the sector robust before you privatise.