Surprise surprise! NZ's self-proclaimed 'leading' investment banker is an advocate of privatisation. In this latest article he wants to see the National Party prepare state owned enterprises for sale. The government has said they will only do this in their 2nd term.
I personally have no privatisation of state assets. In fact I am so keen on privatisation that I would like to see the police force, post offices, even judicial services privatised. I see no reason why we shouldn't privatise everything....oh, except one! The problem is that the people overseeing the process have no personal credibility when it comes to moral values.
I have yet to see a privatisation program which was structured in the interests of the public, who purportedly own these assets. It was all about the major stakeholders, namely:
1. The government
2. The investment bankers
3. The lawyers
4. The brokers
5. The foreign buyers
The taxpayer really comes a slim last with consideration. They will certainly get the long term benefits that arise from greater market dynamism, but even the competitive advantages are often slim. Here is why? Naturally competitive markets are a rich tapestry of competing interests, i.e. There will be some corporations who integrate gas and electricity, others who might vertically integrate coal mining and power generation, and still others who might combine power and retailing, even engineering consulting, or operations overseas. When we have investment bankers organising asset sales, they go:
1. Every corporation gets a gas generator, a hydro generator, or maybe they decide instead,
2. Every corporation specialises in a certain 'species' of generating plant, whether gas, coal or wind.
The implication is that all companies look at the same, so there is very little basis for 'price differentiation', or they asset holders become specialised, so the least advantageous, say coal-fired power generators are cross-subsidised by the others.
The reason why this is important is that it determines the quality of your privatisation outcome. If there is no basis for price differentiation, you get a lot or collusion among the parties with any competition being cheap rhetoric. If the assets are sold as specialised packages, then you get stratified asset operating costs, which results in one more expensive producer being carried by the others. i.e. In NZ, 75% of generating plant operates at near-zero cost, whilst 15% are expensive gas-fired plants. These gas-fired plants set the price at the margin. Prices can drop off-peak only so low as to knock the gas-fired producers out of the market.
The implication of this is:
1. Investment bankers get paid more for delivering the outcome which is good for government - higher asset prices so they can get pay for what they want to pay. In the process they leave taxpayers with a market structure which results in high prices, low competition, or high collusion.
2. The government gets to pay off debt, gets to distance itself from the industry. i.e. It can blames executives for their high prices, knowing it can do nothing to intervene.
3. Foreigners often get cheap assets because there is a shortage of buyers for such assets. Often these markets are risky, because they are still quasi-government owned, and they are still developmental in terms of market maturity.
It might simply be easier and better for the government to corporatise these assets, then say to the directors that they can have 5% of any profits they can deliver over their previous profit. Or to say that the company who exceeds their counterparts, gets 10% of any profit advantage. Of course you would have to start with a level playing field, and you would have to strip out the effect of fuel cost variability. It might just be a more favourable precursor to privatisation. It would allow the government to sell efficiently run assets, as opposed to bureaucratic sloths.
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Author: Andrew Sheldon
