Phil Barry: Private ownership outperforms public

By PHIL BARRY

A notable feature of the international landscape over the last two decades has been the huge shift in control of commercial enterprises from the public to the private sector.

Since 1990, close to US$1 trillion worth of assets worldwide has been transferred to private ownership.

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

Centre-left Governments (eg, in Britain with the promotion of public-private partnerships, France, Germany, Norway and, at the state or local government levels, in Australia and Sweden) have been among the most active in recent years in reducing the role of the state in owning and running commercial enterprises.

But just because everyone else is doing it does not necessarily make it right. The real question is, does privatisation work?

The studies almost invariably say yes.

A recent survey of 22 published academic studies found that 20 of them concluded that businesses performed better after they had been privatised.

Of 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.

In addition, privatisation was found to increase the competitiveness of the markets the former SOEs operate in, as the previously state-subsidised enterprises had to succeed (or fail) on their own merits.

Recent surveys by the OECD and World Bank provide equally conclusive findings.

In total, the three surveys review more than 50 published studies examining hundreds of privatisations around the world.

Few issues in economics have been subjected to such exhaustive investigation and provided such clear results.

The balance of evidence conclusively indicates that:

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

* Privatisation of SOEs is likely to lead to improvements in their efficiency and to more open and competitive product markets, benefiting consumers, taxpayers and the economy as a whole.

The evidence does not suggest that private ownership is always more efficient. Some state enterprises can perform very well, at least for a period.

Conversely, as the case of Air New Zealand highlighted, private companies can and do make mistakes.

But the balance of evidence clearly demonstrates that, on average and over time, the private sector is likely to be more efficient in running commercial enterprises.

But does all this matter for New Zealand? Hasn't it all been done?

Not at all. The Government still owns a vast array of commercial businesses, with assets totalling $22 billion.

Local government owns even more, with investments in airports, commercial property, forestry, ports, power companies and a variety of other assets.

The economic studies noted above do not just indicate that there are benefits from privatisation; they indicate that the gains from privatisation are large.

Those benefits come in the form of more efficient and profitable businesses; greater competition in markets and thus often better and lower-cost goods and services for consumers; and greater and/or better targeted investment.

In the most comprehensive study, done by the World Bank, the net gains to the economy from privatisation averaged 26 per cent of the firms' pre-divestiture sales.

A similar gain from privatising New Zealand's Government-owned businesses alone would boost GDP about 1 per cent a year.

Many fears were raised about privatisation during the mid-1980s and 1990s. We can see now that these fears had little substance:

* Privatisation did not lead to fewer jobs. Overstaffed SOEs had to shed jobs but the economy as a whole gained. Total employment in the economy has grown 22 per cent since 1988.

* Privatisation has not increased the level of foreign control. Regardless of who owned the shares in the SOEs, the assets stayed here, as did the jobs and the Government's sovereign powers to tax and regulate.

There are in fact good reasons for allowing foreigners to participate in assets sales. The number of bidders increases, thus lifting the likely sale price for the taxpayer.

In addition, foreign ownership facilitates the transfer of the best international technology and know-how to the firm.

New Zealand's small size and remoteness make it all the more important that our companies can access international capital markets.

* The Crown's financial position was strengthened, not weakened, by the asset sales.

New Zealand's public sector debt declined dramatically (from more than 50 per cent of GDP in 1992 to less than 20 per cent now), with proceeds from privatisation accounting for more than half the decline.

It is sometimes claimed that despite the economic costs, public ownership helps the Government to achieve its social goals. But there are almost certainly better ways, such as direct assistance to low-income households.

A privileged few may benefit from state ownership. But the great majority of those on lower incomes are likely to be penalised, through the poorer, more expensive services that state enterprises typically provide and through the lower economic growth that results.

The objective evidence indicates that New Zealand, like other countries, has benefited from privatisation.

To take two examples:

* The privatisation and deregulation of Telecom brought huge benefits (estimated at $500 million a year) to consumers (from significant declines in the price of phone services, reduced waiting times for services and better access) and to the company (from higher productivity and increased output).

* Despite concerns about the performance of Tranz Rail, the privatisation of NZ Rail has benefited the economy hugely (by up to $9.8 billion in total) as freight prices have fallen and taxpayers have not had to continue subsidising the state-owned rail business.

Many other former state-owned companies, such as Auckland International Airport, BNZ, Capital Properties, Contact Energy, Postbank, Rural Bank, State Insurance, Wellington International Airport, Works Development Services and local-government enterprises such as the partly listed ports (Auckland, Lyttelton, Southland and Tauranga) and bus services (such as Stagecoach) have flourished under private ownership.

But not all privatised companies have succeeded. Air New Zealand, for example, failed spectacularly last year.

That does not mean privatisation has failed. Sometimes private enterprises get it wrong. That is the nature of private enterprise.

Yet the evidence clearly shows that they tend to get it wrong less often than public enterprises.

That is not to say, by any means, that all activities should be privately owned.

Governments have a key role to play in owning and providing such public goods and services as courts, defence, foreign policy and police.

Further, Governments have a more general role of providing the legal and regulatory framework within which all enterprises operate.

In the last few years, New Zealand, unlike most OECD countries, has seen the balance shift towards increasing public rather than private ownership of commercial operations.

We have seen the energy industry steadily renationalised with the state-owned entities buying the retail customers from other energy companies (state-owned Genesis is now the country's biggest energy retailer), community trust-owned Vector's successful bid for UnitedNetworks (making Vector the nation's largest electricity lines company) and Solid Energy's buyout of Todd's share of Spring Creek (their joint coalmining venture on the West Coast).

Looking ahead, it appears quite likely that some or all of NGC's power stations will end up in the public sector.

In other sectors we have seen the renationalisation of accident insurance, the Government's purchase of an 82 per cent stake in Air New Zealand and the start-up of Kiwibank.

* Phil Barry is author of the recent study, The Changing Balance Between the Public and Private Sectors, published by the Business Roundtable. He is managing director of TransInter, an economic and financial consulting company.