Phil Barry: Going private benefits business, consumers

An "honest evaluation of the privatisation of community assets" was sought by John Minto in an article recently, and his call is timely and warranted.

Fortunately, to undertake an objective evaluation of the effects of privatisation we do not need to rely on anecdotal evidence. Few issues in economics have been subject to more exhaustive empirical investigation.

The table summarises the results of a survey of the published studies.

Twenty of the 22 studies surveyed found that businesses performed better after they had been privatised. Of the studies that compared the performance of public and private enterprises operating in the same industry, eight of the 10 concluded that the private enterprises performed better.

Surveys by the OECD and World Bank provide equally clear findings. In total, the surveys review more than 50 published empirical studies examining hundreds of privatisations around the world. The balance of all this evidence conclusively indicates that:

* Private firms tend to be more efficient than their counterpart state-owned firms, especially in competitive industries.

* Privatisation of state-owned enterprises (SOEs) is likely to lead to improvements in the efficiency of the enterprises and to more open and competitive product markets, to the benefit of consumers, taxpayers and the economy as a whole.

The international evidence that privatisation works is compelling. But this still leaves the question of whether New Zealand may be different.

Minto highlights what he perceives to be failings in four privatised enterprises: Telecom, Air New Zealand, New Zealand Rail and Postbank. But even if he was right in claiming those four privatisations had failed, would a balanced assessment not consider also the performance of the 26 other major state assets sold to the private sector in the period 1988 to 1999?

Might an honest evaluation consider, for example, the experience of companies like Auckland International Airport, Capital Properties, Contact Energy, Rural Bank, State Insurance, Wellington International Airport, Works Development Services and local government enterprises like the partially listed ports (Auckland, Lyttelton, Southland and Tauranga) and bus services (such as Stagecoach), all of which have flourished under private ownership?

A more careful and objective evaluation of the cases of Telecom and New Zealand Rail would also be helpful.

A study of the effects of the privatisation and deregulation of Telecom found enormous benefits to the New Zealand economy, estimated at $500 million a year. Consumers benefited from significant declines in the price of phone services and reduced waiting times for services, and the company benefited from higher productivity and increased output.

A similar published study of the privatisation of New Zealand Rail found the economy benefited hugely (by up to $9.8 billion in total) as freight prices fell and taxpayers no longer had to subsidise the state-owned rail business.

Minto is correct that not all privatised companies have succeeded. Air New Zealand, for example, failed spectacularly.

But isn't that the nature of private enterprise? Some companies succeed and others fail. Privatisation cannot guarantee the success of each and every business.

The real question in relation to Air New Zealand is whether the Government had to step in and bail out the private shareholders.

The taxpayer has not done well to date out of the Government's investment in January 2002. The average entry price paid by the Government for its 80 per cent shareholding in Air New Zealand was $1.30 (taking into account the rights issue in 2004). On June 2 this year Air New Zealand's shares were trading at $1.22.

Privatisation is a worldwide phenomenon that has seen a huge shift in resources from the public to the private sectors over the past 25 years.

The World Bank has noted that "privatisation is now so widespread it is hard to find countries not using the approach: North Korea, Cuba and perhaps Myanmar make up the shrunken universe of the resistant".

New Zealand is now probably the only country in the OECD with a broad ban on privatising SOEs.

It is possible that New Zealand is right and the rest of the OECD is wrong. But an honest evaluation of the evidence would suggest the odds point strongly in the other direction.

* Phil Barry is an independent economic and corporate finance adviser who has published several papers on privatisation and corporate governance.