Study Examines Realities-Myths Of Privatisation

Study Examines Realities And Myths Of Privatisation

Privatisation is a politically sensitive issue in most countries. However, New Zealand appears to be the only member of the Organisation for Economic Cooperation Development (OECD) where the central government has a comprehensive ban on privatising state-owned enterprises (SOEs). As a consequence, New Zealand is sacrificing growth opportunities and other benefits.

These are among the findings of a study by former Economic Counsellor to the OECD, Phil Barry, entitled The Changing Balance Between the Public and Private Sectors and published by the New Zealand Business Roundtable (NZBR).

"There has been much controversy about the benefits of privatisation, both internationally and in New Zealand", Roger Kerr, NZBR executive director, said. "The study was commissioned to survey relevant evidence and to examine whether the litany of criticisms about privatisation stands up to scrutiny."

The study reports that since 1990, more than US$1 trillion of assets in commercial enterprises worldwide have been transferred to private ownership. When privatisation got underway some 20 years ago, there was only limited empirical evidence of the relative efficiency of public and private enterprises. In recent years the results of privatisation have been one of the most exhaustively studied topics in economic research. The balance of international evidence reported in the study conclusively indicates that:

- private firms tend to be more efficient than their counterpart state-owned firms, especially in competitive industries; and

- privatisation of state-owned enterprises 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 evidence from New Zealand studies is consistent with the general finding that privatisation 'works'. Owners of private-sector companies have better incentives and greater ability than governments to monitor the performance of their investments.

As Phil Barry emphasises: "[T]hat is not to say that private firms always outperform public enterprises. But the evidence shows clearly that they usually do." It follows that policy should be based on this finding: governments should not bet against the odds. The study acknowledges that gains accrue from corporatisation and that exposure of firms to competition is important, but insists that in addition "ownership matters".

The report also makes it clear that arguments for privatisation relate primarily to commercial activities, not to public goods or services. With privatisation, governments are better able to focus on essential public good activities, like law and order.

One chapter of the report addresses in depth the common criticisms of privatisation in New Zealand. Arguments that privatisation involves selling the 'family silver', increases foreign control of the economy, costs jobs, benefits shareholders but not consumers, pushes up prices and weakens the government's financial position, as well as other claims, are examined and found to have little substance. Perceptions that privatisation is simply in the interests of 'greedy corporates' are also invalid: the study makes the point that one means of privatisation is to give away shares to voters or consumers. The question and answer format is intended as a handy reference source for journalists and others interested in the privatisation debate.

"Political parties may not want to talk about privatisation, but the reality is that New Zealand is now slipping behind the great majority of other countries where governments are pulling out of owning commercial businesses", Mr Kerr said. "Other countries are also increasing the role of the private sector through public-private partnerships in providing social services such as health and education.

"Based on World Bank estimates, New Zealand could gain over $1 billion a year or around 1 percent of annual gross domestic product (GDP) by privatising SOEs. That makes no allowance for assets held by local government, which total around $46 billion.

"The government cannot go on ruling out pro-growth policies such as reducing the share of government spending in the economy, the tax reforms recommended in the McLeod review, changes to employment and resource management law and privatisation while maintaining that its top priority is to increase New Zealand's rate of economic growth. Phil Barry's report provides a basis for informed debate about a policy that must form part of a credible growth strategy", Mr Kerr concluded.

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