Sir Roger Douglas: Aims of 80s privatisation misunderstood

Brian Gaynor's recent article on Air New Zealand ("Air NZ: have we learned nothing?"), made me realise how even supposedly informed commentators buy into the left's propaganda, particularly in the area of privatisation.

Gaynor's claim that the primary aim of New Zealand's privatisation programme was to get money for deficit purposes was incorrect.

The overriding objective of the Government's asset sales in the 1980s was to maximise the sales programme's contribution to the economic performance of the economy. It was believed that this would be best achieved by establishing competition in the markets in which the businesses operate prior to sale.

In the case of Air New Zealand, the internal air market was deregulated, even though this meant the company was sold for less than it would have been worth as a monopoly.

The introduction of competition into domestic air travel revolutionised the industry. Discounts of around 45 per cent on previous prices on specified flights brought considerable economic benefits to New Zealand.

Having created an appropriate regulatory environment, the Government generally favoured the sale of all the Government's interests in each business. The reason for this was that passing control of the business allows for a premium price to be obtained, because the buyer can direct the enterprises' resources to their most efficient use. It also allows for control of the business to be contestable, thereby maximising the incentives on management to operate efficiently.

This objective was subject to the requirement that the method and timing of each sale would be assessed on a case-by-case basis.

In the case of Air New Zealand, 100 per cent was sold to Brierley Investments (BIL) and Qantas, with a requirement that BIL sell down part of its holding by way of a sharemarket float. Along with Richard Prebble, I was strongly opposed to any sale of Air New Zealand to Qantas. Qantas was a competitor of Air New Zealand and therefore brought no economic benefit to them or New Zealand. I favoured British Airways, even if that meant a partial sale, because of the economic benefits it would bring to New Zealand and Air New Zealand.

How Qantas got the nod is a story that can wait for another day. Suffice to say that Qantas and Australian politicians pulled the wool over some eyes, just like they did recently to Michael Cullen, with disastrous results.

What commentators like Brian Gaynor conveniently forget is that in the decade to March 1985, additional debt of $21 billion was incurred without any matching increase in non-financial assets. This increase in debt arose because politicians believed they could pick business winners better than leaving the job to the private sector.

Jim Anderton and at least three-quarters of the Labour caucus still believe this is so.

Politicians in this Labour Administration often argue that Government spending on favoured projects expands employment. Suppose a government spends $1 billion on pet projects. How many jobs do they create? Once secondary effects are taken into account, the answer is, none. $1 billion in extra taxes will reduce both consumer spending and private saving, thereby destroying at least as many jobs as the Government spending will create.

The cost to New Zealanders of the extra $21 billion in debt not backed by assets of any value was, in the 1980s, and still is today, horrifically costly.

If the cost of servicing that debt in 1986 had been available for other uses, any one of the following tax reductions or expenditure increases would have been financed:

* GST would not have been required and, in addition, $800 million would have been available for deficit reduction.

* A 45 per cent reduction in personal tax rates.

* A flat rate of income tax of 14 per cent could have been introduced.

* Government expenditure on health could have been doubled.

* Government expenditure on education could have been doubled.

Another myth that needs to be done away with is that the Government sold various assets cheaply. This was never the case. Telecom, for example, sold at a price equivalent to 6 per cent of GDP, a price unheard of anywhere else in the world.

As Alan Gibbs said in 1989: "Can you remember the environment for business in New Zealand in 1984? It was a place where businessmen spent half their lives in ministers' offices seeking favours or second-guessing what the Government was going to do. To import most consumer goods you had to get a permit from a bureaucrat. Unless you had foreign exchange, you had to get funds at a premium through a depository at the Reserve Bank if you wanted to buy Australian shares. The top personal tax rate was 66c in the dollar at just over twice the average wage. We had a sales tax with 17 different rates."

Let's hope this Labour Government, with the support of left-leaning commentators, does not take us back to those days.

* Sir Roger Douglas was Minister of Finance from 1984 to 1988.