Top StoriesMay’s sharp fall in jobless numbers added to the greenness of the ‘recovery’ (or less bad) thesis; overnight June’s unemployment figures were so awful that they could have stunted at least, the wavering shoots.
Refuted economic doctrines: privatisation
|
The large-scale privatisation of publicly-owned enterprises both in capitalist countries like the UK and Australia and in formerly communist countries after 1989 played a big role in promoting the kind of triumphalism that characterised much commentary about free-market capitalism in the 1990s and (to a somewhat lesser extent) in the years leading up to the crisis. How well do arguments for privatisation stand up in the light of the financial crisis? The case for privatisation had two main elements: first, there was the fiscal argument for privatisation, namely, that governments could improve their financial position by selling government business enterprises. This argument assumed that privately owned firms would have higher levels of operating efficiency, and therefore that the value of those firms would be increased by privatisation. The second argument was a dynamic one, that the allocation of capital between alternative investments would be improved if governments were not involved in the process. Both of these arguments have been fatally undermined by the collapse of the efficient markets hypothesis. The fiscal case for privatisation must be assessed on a case by case basis. It will always be true for example that if a public enterprise is operating at a loss, and can be sold off for a positive price with no strings attached, the government’s fiscal position will benefit from privatisation. Various early ventures in public ownership, such as the state butcher shops operated in Queensland in the 1920s (apparently a response to concerns about thumbs on scales) met this criterion, and there doesn’t seem to be much interest in repeating this experiment. However, for most recent privatisations in developed countries, the sale price has been less than any plausible estimate of the value of future earnings, discounted at the government bond rate. The fiscal case for privatisation therefore rests on the claim, derived from the efficient markets hypothesis, that the correct discount rate to use is one based on the private sector cost of capital and therefore dominated by the expected rate of return to equity capital. The choice of discount rate makes a difference because the rate of return to equity has historically been much higher than the rate of interest on government bonds, a gap that can’t be explained by standard economic arguments about risk premiums. Although many explanations of this ‘equity premium puzzle’ have been offered, for present purposes they can be divided into two classes:
In the light of the global financial crisis and the events leading up to it, the case for explanations of type two is overwhelmingly strong. The dynamic case for privatisation is based on the idea that the allocation of investment will be better undertaken by private firms than by government business enterprises. This claim in turn relies on the assumption that the evaluation of risk and returns undertaken by investment banks, with the assistance of ratings agencies, and the availability of sophisticated markets for derivatives like CDOs will be far superior than anything that could be obtained by, for example, using engineering calculations of the need for investment in various kinds of infrastructure, and seeking to implement the resulting investment plans on a co-ordinated basis. The global financial crisis has shown that, for most of the past decade, market estimates of the relative riskiness and return of alternative investments have been entirely unrelated to related. For infrastructure in particular, the decision processes of Byzantine creations like Macquarie and Babcock and Brown have determined the allocation of investment. Unsurprisingly, the result has been a mess. I’ve been making this argument for some time, so I can anticipate the immediate response that, if the case for privatisation developed in the 1980s were invalid, it would be necessary to advocate public ownership of all enterprises. I’m never quite sure if those putting forward such arguments are as ignorant of marginal cost and benefit calculations as they appear to be, or whether it’s simply meant as a debating trick. But it should not be hard to see that, if the public sector has lower costs of capital, while the private sector has (at least in a wide range of activities) lower operating costs and greater responsiveness to consumer demand, the optimal economic structure will involve public ownership of some firms and private ownership of others, that is, a mixed economy. |
|
|
8 Comments
Irrespective of the efficiency of private enterprise over government control there seems little point from a public’s point of view if you are exchanging a government monopoly for a private one.It just means that any profits go to the monopolist rather than the government (Taxpayer) for a government capital gain which as is the wont of governments will prove to be ephemeral.
Worthwhile read that underpins the fatal consequence of most privatisation, outsourcing and ‘down size to right size’ activities undertaken by Western global governments over the past decade or so - that is the resulting deskilling of the government department that allows the total indifference to what is real (a.k.a. ‘bullshit’) of the less than scrupulous privateer types to dominate and baffle the decision makers who, after all, have difficulty, at the best of times, with discerning fact from the comfortable fiction they are fed by their advisors.
May it not also indicate, according to your hypothesis, that governments’ should provide the capital at lower than market interest rates, and private enterprise should obtain an efficiency dividend from running the enterprise effectively, in a loose partnership with the government, on a long-term basis, and a loan that is repaid to the government at less than market rates, but higher than the government borrowing rate.
The infrastructure, which has depreciated over the life of the loan to allow the company to reduce taxes to be paid, allows the private enterprise to make a profit 3 ways. Firstly, from the enterprise dividend., as adjudged by an independant arbiter on a financial year to year basis. Secondly, from fees and charges for public use of the infrastructure. Thirdly, from savings on the loan interest rate which, coming from the government instead of a bank, will save them money over time.
Hence, they should be able to make a profit, as should the government.
Also, the public should benefit by having an option at the end of the life of the agreement to keep ownership of the piece of infrastructure at its original cost price, or sell it at a profit to the private sector. We could have a plebiscite at each election to vote on it.
The privatisation hypothesis is about to get a real workout. At the end of this month Communications Minister Conroy is to announce the successful tenderer for the rollout of high speed broadband. Telstra dealt itself out of process because its tender, apparently did not meet the criteria. Being the owner, and theoretically in control, of the bulk of this nations telecommunications infrastructure, it is difficult to see how the broadband rollout can proceed without the co-operation of Telstra. One aspect John Quiggin did not touch on, is the loss of control that comes with the loss of public ownership.
The author’s argument here does not support the broad conclusions he is making. Where the government is operating a business intended to make a profit as well as provide a public service, Australia Post being a good example, discounting the business’ projected future cash-flows at the government bond rate is totally inappropriate. This is simply because the future cash-flows are much less certain than those derived from an investment in government bonds. This has nothing to do with the efficient market hypothesis (EMH), discredited or otherwise. While the EMH is based on risk and return principles, these principles are not based on EMH, but on common sense derived from millennia of people engaging in business and commerce.
As such, Quiggin’s argument, which is really the well-established one that government has a lower costs of borrowing (i.e, through issuing government bonds) and should use this for public benefit, only really holds where the government is not seeking a commercial return on its investment, such as the building and maintaining of hospitals, schools and military equipment. Where making money is part of the objective, it is the adequacy of the risks and returns that matter, not the government’s own cost of capital.
Hmm… I wish I could have followed that, but don’t have the requisite understanding of economics.
I am left with the ever-tightening of clenched teeth as the privatised services I have to deal with display as much (more?) incompetence as public ownership ever delivered, my costs go up, my confusion rises as I have to figure out who’s going to rip me off least, and meanwhile some smarmy bugger is laughing all the way to the bank. That he probably has shares in.
I don’t want to join this ‘economy’. I don’t want to get rich. I don’t want to use my credit card for a flat screen TV. But I don’t want to feel like a third-class citizen if I do something constructive for society, like teach, nurse, etc.
I feel like I’ve been robbed, for years…
The argument that government businesses are inherently less efficient than private ones has always puzzled me, and there does not appear to be a lot of evidence for it. Public managers rarely earn the kind of salaries reserved for executives of private companies, or provide the same incentives for short-term planning, and public enterprises do not have to support a continual drain into share dividends. The main inefficiency in public companies is the interference of politicians, who have rarely allowed adequate re-investment in capital or new technology. Thus a public enterprise might find itself a moribund candidate for privatisation through no fault of public ownership per se, but by a failure of political independence. Rather than throwing the proverbial baby out with the bathwater, surely it is a better idea to allow public enterprises to operate with adequate safeguards to ensure their good management when politicians seek to treat them as cash-cows.
Despite the use of economic jargon to add complexity, the article would seem to over simplify the privatisation v public ownership debate.
Some key points that you are missing:
1. Where business is concerned with profit, government is concerned with re-election. Hence investment decisions made by government do not use “engineering calculations of the need for investment in various kinds of infrastructure” but are highly politicised and concerned primarily with securing votes.
2. Privatisation from a consumer perspective is not just about efficiency but competition. The benefits of efficiency gains from privatisation are generally irrelevant when the result is a monopoly/oligopoly as many of Australia’s major industries would attest to.
3. Efficient is not the same as equitable. Businesses seek to sell their products for the highest price possible at the lowest cost of production. If the goal is ‘equitable’ pricing of a service/product (eg eg urban and rural consumers paying the same price), this will not be provided by a profit making enterprise without sufficiently strong competition or legislation.