Wednesday, 9 May 2012

Say after me, "efficiency not price"

Over at the TVHE blog James Zuccollo notes that,
Asset sales are in the papers again today:
If New Zealand’s Government were a business, it would have no case to sell stakes in its energy generation firms… Sustento director and economist Raf Manji said. It was admirable for the Government to lower debt, but the numbers around selling stakes in energy firms to do so did not add up, he said.

No more important public good existed than energy, as it was essential to people and businesses, so it was dangerous to raise the firm’s focus on profits.
In response James correctly says, first, that a country is not a large company and shouldn’t be treated as such and secondly that energy isn't a public good.

Let me add a couple of more points. As to Raf's argument that "it was dangerous to raise the firm’s focus on profits" I would say, first that under the SOE Act, SOEs are basically required to maximise profits so there seems little difference on this score between SOEs and private firms; and second, if we really don't want to have energy firms focusing on profits this doesn't imply government ownership since you could just set these firms up as private but not-or-profit firms.

In addition let me make a point I have made before, that the logic behind the sate of state assets is about the efficiency of resource allocation not the price received for the assets. The reasons for privatisation can hold even if you get nothing from the privatisation programme. Talking about maximising the return from privatisation, even if this is to pay off debt, misses the whole point of privatisation which is to improve the efficient and productivity of the economy. If we agree with Raf that energy is essential to people and businesses then its even more important that we get this sector being as efficient as possible and if privatisation helps do this then we should privatise. If we just worry about how much we will get for the sale of assets then we should sell all of the state assets with the firms being monopolists. But that's unlikely to do much for efficiency, productivity or welfare.


Raf said...

Fair comment but if the SOEs are already operating as profit maximizing entities (with a fair amount of public oversight), why is privatizing them going to make them more efficient? Is there some other approach the private sector has, which is over and above, profit maximization?

Paul Walker said...

Raf. Thanks for the comment. The short answer is that in the short-term it is unlikely to be much difference between SOEs and private firms. But over the longer term private firms are more protected from political pressures than SOEs. So the big advantage to privatisation is the depoliticisation of the firm.