Once, New Zealand had a large number of State assets. Over the decades New Zealand governments had invested in and developed a range of Government-owned companies and agencies as a means of ensuring the country’s economic and (later) social wellbeing. The zenith of Government-led growth and development was achieved in the post-World War Two period. In the final two decades of the 20th Century, though, the focus shifted away from Government investment and ownership toward private investment and ownership. Whereas, previously, the Government had invested in and owned assets for a multitude of purposes, it now divested itself of those same assets. The role and nature of the State changed. Instead of directing and controlling the market to ensure economic wellbeing, the market would now direct the State to ensure the same conditions. Increasingly, ownership by the State of assets was seen as anachronistic.

In the late 1990s, the political and public pressure on both major parties forced them to rethink the merits of asset sales and privatisation. The result was that the privatisation programme which at this point had been pursued by Labour and National was halted. In 1999, with the election of the Alliance/Labour Government, remaining assets were retained and some former privatisations, particularly in the area of ACC, were reversed. However, this consensus sat uneasily with members of New Zealand’s political and economic elite. While National publicly gave public ownership “lip-service” there was a desire to return to the privatisation regimes of previous administrations. However, public opposition and sensitivity regarding the issue caused those supportive of the concept to tread carefully. Of those treading carefully, John Key, the newly elected (and ambitious) leader of the National Party was the most careful.

Key and National announced the Party’s privatisation policy months preceding the 2008 election, providing him and National ample time to change the policy should it prove contentious. Further, Key skirted around the issue of full privatisation and proposed a range of alternative options such as partial privatisation - a so-called “mixed ownership” model - stating that under such a model the Government would retain majority ownership. When the issue did indeed prove contentious, Key backed away. He pledged that the matter was off National’s first term agenda.

But, as cynics pointed out, this merely allowed National to continue to pursue the matter after the election, should it win. This it did, with some enthusiasm, with Key, Bill English and other senior Ministers advocating the partial privatisation of the State-owned electricity companies and assets such as Kiwibank, which had been formed by the Alliance/Labour Government in response to the lack of a State-owned bank. When confronted about a partial sale of Kiwibank, Key remarked that he was merely “kicking the tyres”.

The Myth Of Paying Debt

Over the past year, the Government has repeatedly tried a number of approaches to justify the impending sales and convince a sceptical public that it is the right thing to do.(1) While these approaches (or variations thereof) have principally focussed on debt, Key has been criticised as to the inconsistency of what debt he means and the number of purposes that the proposed money from sales would go toward. In the past year, the Government has stated that the proceeds would go toward reducing New Zealand’s debt as a result of the current economic recession; or go toward reducing the debt incurred in the aftermath of the Christchurch earthquakes. In a remarkably unsophisticated series of comments, the Prime Minister even went so far as to attempt to compare New Zealand’s rising indebtedness to that of Greece, which only asset privatisation could prevent.(2) In the lead up to the 2011 election, Key deviated from the debt angle and touted that the creation of a Future Fund, in which the proceeds gained from the partial asset sales, could be used as a means of funding social spending such as healthcare and education. (3)

One can ascertain that there have been a range of arguments put forward by the Government to justify sales that the vast majority of New Zealanders remain opposed to. Yet despite this opposition, the Government has decided to press on. This led to one Maori participant, at one of the hui held by the Government, as an attempt to pacify growing Maori opposition over the proposed removal of section 9 of the State-Owned Enterprises Act in the sales, to ask how many times the Government has to be told “no” before it realises that people are opposed to the sales (section 9 has since been partly restored to the law enabling the sales, but it will only apply to the Crown, not any new private part-owners. Ed.). Unfortunately, it appears that “no” is not a word with which the Government and the privatisation advocates are familiar. That is because at the root of the Government’s position is a simple belief that Government should only have a minimal role in the economy. The origins of this argument are not economic, they are ideological. If this appears to be a familiar argument it is because this position has been at the centre of New Zealand’s economic and political discourse since the 1980s.

In that troubled decade, the Fourth Labour government vigorously promoted the idea that the State sector was both financially inefficient and ineffective. Government, the public was informed, was bloated and wasteful. What was needed, according to the Prime Minister, David Lange and his Minister of Finance, Roger Douglas, was a complete and radical restructuring of the State sector to allow it to become financially solvent and competitive. With that in mind, the Government turned a number of State departments into profit making State corporations (State-Owned Enterprises). These would be as “lean” and as “mean” as their private sector counterparts. Furthermore, the Government alleged that money made from the profits of these new SOEs would be used to booster the Government’s accounts and lighten the financial load on the “overburdened” taxpayer.

However, in its second term (1987-90) Labour started to even move away from the SOE model which it had touted and created. Increasingly, Ministers and MPs argued that what was needed was the privatisation of State-owned assets. To justify these claims, Ministers posed the question as to why the State should be involved in hotel ownership, forestry, shipping or insurance. These were fields of investment that were best left to the private sector while the State concentrated on its core “businesses” of provision for health, education and welfare.

Shortsighted

Subsequently a number of State assets were placed on the auction block and sold off to private buyers. Amongst them was the Government-owned insurance firm State Insurance. As anyone who has lived in Christchurch or has followed the myriad of twists and turns of the various private insurance companies in the aftermath of the Canterbury earthquakes will be quite well aware, the absolute folly of this argument becomes very apparent. The events of the past 18 months in Christchurch have proved conclusively why the State NEEDS to be involved in the insurance area and why it is a mistake to allow private providers sole dominance.

After its election in 1990, the incoming National government unleashed another round of asset sales. This culminated in the aborted “Spring Time” sales of Jim Bolger’s Government in the mid 1990s and in the resignation of Winston Peters and New Zealand First from the Government in protest at the sale of Wellington Airport. Never mind that, as Treasurer, Peters had overseen a number of asset sales himself. In the aftermath of asset sales in New Zealand and in the United Kingdom - another country which sought to remove its recent “socialist” past by privatisation of public assets - the vast majority of the shares in the newly privatised assets were brought by large private companies. A considerably smaller amount, less than 10%, was purchased by individuals. Further, these individuals for the most part were not ordinary “Mum and Dad” investors, but tended to be from the upper echelons of society. They were people who had a sizeable amount of ready disposable income at their fingertips.

Jacqui Dean, the National MP for Waitaki, is one of those who have persisted with the disingenuous argument of the Future Fund. She recently informed a public meeting held in Dunedin that the partial sales could be used to better fund provision in public services such as healthcare and education(4). Not only was this the same argument that Ministers of the Lange government would regularly mention as justification for the sales, but it proved to be demonstrably false. It also had the ironic effect of undercutting that Government’s claims in relation to its corporatisation programme. The Government argued that by corporatising State-owned assets, and allowing them to act in the same manner as private corporations, the profits made from those corporations would fund health, education and provide social welfare. As opponents of the sales have noted, that objection still holds true.

Of course, Dean does not have the same philosophical problems as most of those Labour Ministers did. They were trying to justify the corporatisation and later privatisation policies pursued by that Government and link them with Labour’s social democratic goals of social justice. It proved to be an ill-fitting mix. Ideologically, National is largely supportive of the idea of privatisation. But, it also realises that privatisation is unpopular with the vast majority of the New Zealand public. What better, then, than to have the money from partial sales used to fund increased social provision?

You Can Only Sell Something Once

Dean’s comments could best be summed up by the saying “that those who do not learn from the past are doomed to repeat them”. The lessons of the 4th Labour and National governments are exceptionally applicable. A one off amount garnered from an asset sale is hardly likely to make up for the loss of the revenue stream from the asset. The partial privatisation of public assets would actually reduce the overall revenue available to the Government to fund social services. In this case, 49% private ownership would have the effect of cutting in half the amount of revenue provided to the State for funding those services that Dean is touting, such as education and health care. As anyone who has owned something and then sold it will tell you, once you sell something you can only spend the money once. Then, you are faced with either selling something else or alternatively, going without.

New Zealand is, if one follows this line of argument, in a situation where it is soon going to have to go without. The number of assets available to the Government for sale to private investors is not large. Most of New Zealand’s assets were actually privatised in the 1980s and 1990s, leaving the Government with a relatively small number remaining. Therefore, the State is essentially selling its core strategic assets. Further, the record of some privatised assets has not been great. Two examples readily spring to mind – Air New Zealand and Kiwi Rail (formerly New Zealand Railways). Both of these agencies had been previously owned by the State and then sold off to private investors. In both cases, private owners ran the industries into virtual economic and developmental insolvency. Both New Zealand Rail (which became TranzRail) and Air New Zealand were progressively asset stripped and underdeveloped by their private owners to the extent that both would have collapsed if the State had not repurchased them. What is disturbing about the proposal of the sales is that Air New Zealand (and most probably, KiwiRail at some point) is back on the auction block. Not content with having to bail out a nearly bankrupt Air New Zealand over a decade ago, the Government is asking us to put our faith in significant private investment in our national airline, again.

A third formerly State-owned asset could also be mentioned at this point, Telecom. Formerly part of New Zealand Post, Telecom was split away from Post in the 1980s, corporatised and then privatised. The communications infrastructure that had been built up by successive New Zealand governments over decades was increasingly underinvested in by private shareholders, who were more interested in their share portfolios than in development. At the time of its sale in 1990, Telecom was one of the world leaders in telecommunications; by the end of the decade, it was increasingly criticised for its substandard network and system. Its dominance in the New Zealand communications market was maintained by its market monopoly.

One of the common arguments put forward by the advocates of privatisation is the idea that the State sector is large and has grown larger, being inefficient and ineffective. The New Zealand public service is not ineffective or inefficient. It is not, even by international standards, particularly large. The New Zealand public sector is, when compared with other public sectors in Western nations, relatively small. It is also governed by largely commercial considerations. It is a profit making entity. Meridian, Genesis, Solid Energy and Air New Zealand are, despite their ownership by the State, commercial companies. They operate in a similar manner to any privately owned company.

Further, the selling of New Zealand’s assets either fully, as was done in the 1980s and 1990s, or partially, as is being suggested by the current Government, has not and will not reduce New Zealand’s overall debt. Privatisation, either full or partial, has, rather, had the effect of actually increasing the nation’s overall debt. In particular, private debt - which makes up approximately 70% of New Zealand’s overall debt - has substantially increased since the late 1980s. The partial sale of assets would have the effect of allowing this debt to increase further.

Government Has No Idea How Much Sales Will Raise

The other serious flaw in the economic argument is that the Government has no real apparent idea as to what price the partial sales would actually net it. Bill English, the Minister of Finance, recently admitted that the income generated from the sales was largely “guesswork”. The proceeds from the sales have been progressively massaged with English firstly claiming that the sales would bring in $5 – 7 billion, before recently settling on $6 billion.(5) English has also been forced to admit that the sales would essentially rob the New Zealand State of some $360 million in lost profits over a four year period. This is $100 million more than the savings the Government makes by reducing overall debt. As Greens Co-Leader Russel Norman pointed out it makes a mockery of the Government’s claims in terms of debt reduction “as the privatisation of these assets will cost the Government huge amounts of money because the loss in profit is greater than the cost of the reduction in debt.”(6) Added to this is the uncertainly generated by the global financial crisis, which even Treasury admitted could subject existing economic forecasts to large changes in short periods of time.(7) Put simply, the Government has no idea as to how much the assets will be sold for or, indeed, even if they will have the effect of reducing debt.

Equally dubious are the claims that the sale would allow small share holders and investors entry into the market. There is no evidence to support the claim that thousands upon thousands of “Mum and Dad” investors will flock to these newly semi-private companies and buy shares. That evidence which is available suggests that the vast majority of shares will be picked up by large and often foreign- owned transnational corporations. The claim is also undermined by the simple fact that “Mum and Dad” already have shares in the various assets by virtue of public ownership. It is further undermined by the fact that the law to establish the mixed ownership model for the State assets targeted to be partly privatised (introduced to Parliament after this article was written) contains no legal requirement for Kiwis to have first rights to the shares which will be floated. Ed.

Economics and the resulting economic advice provided by economists is not a science. Rather, it is governed by ideological considerations. The asset sale programme is a case in point. The current proposed partial sale of assets is one which is governed by ideology rather than by practical economic concerns. If the sale of assets was governed by practical economic considerations then they would not be either partially or fully sold. But, the Government and its key advisors are not motivated by those practical considerations. Instead, they are motivated by an ideological position, which is then supported by a brand of economics which supports the notion that a small and privately owned economy is better than a larger publicly owned one. Tim Watkins noted in his excellent blog comment, on the advice provided by Treasury to Government, to imagine New Zealand’s economy as a lawn. Treasury takes no or little account of the external factors. It merely takes the point of view of the lawnmower.(8)

NZ Should Increase Public Ownership Of Assets

Winston Churchill is purported to have famously quipped once about the impossibility of finding the “one handed economist”. This was in relation to those economists who would provide him with economic advice and then offer as an afterthought that on the “other hand” he might want to take an alternative course of action. The recent (and ongoing) financial crisis has proven the fallacy of the economic approach pursued by the Government and its advisors. If anything, New Zealand should be actually increasing its public ownership of assets as a means of better improving and promoting its economic base.

To borrow the quote first coined by the Russian revolutionary Lenin, and used by countless Western economists and politicians since, New Zealand needs to control the “commanding heights of the economy”. In order to control the commanding heights of the economy, it needs to have ownership of them. In particular, it needs to have ownership of those strategic assets which the State can use to promote and provide economic stimulus and wellbeing. Presently, the commanding heights are held by those who have little interest in New Zealand’s economic and social wellbeing. Their prescriptions to the issues besieging the domestic and international economies are to retrench and to privatise. As the 1930s proved, increased austerity is not an answer to recession or depression. In this context particularly, selling assets that generate economic returns or can be used to generate domestic economic activity is not a smart move. It is simply time that New Zealand considered the economic “other hand”.

Endnotes

1. TV3 News, (21/2/12, “Poll Shows Asset Sales Unpopular”, Duncan Garner). Retrieved from http://www.3news.co.nz/Poll-shows-asset-sales-unpopular/tabid/1607/articleID/243681/Default.aspx

2. Otago Daily Times ((21/11/11, “Key Says New Zealanders Favour Asset Sales”) Retrieved from http://www.odt.co.nz/election-2011/latest-news/187492/keys-says-nzers-favour-asset-sales

3. Stuff (30/10/11, “National Party Outlines Asset Sale Plans”, Vernon Small and Tracy Watkins). Retrieved from http://www.stuff.co.nz/national/politics/5877791/National-Party-outlines-asset-sales-plan

4. Otago Daily Times, (22/2/12, “Asset Sales Prove Debatable”, David Loughrey). Retrieved from http://www.odt.co.nz/news/dunedin/198648/nz-asset-sales-prove-debatable

5. New Zealand Herald (16/2/12, “Asset Sell-off ‘guess work’ keeps the Buyers Guessing”, John Armstrong. Retrieved from http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10786121

6. TV3 News (16/2/12, “Government Admits to Guessing Asset Sale Profits”). Retrieved from http://www.3news.co.nz/Government-admits-to-guessing-asset-sale-profits/tabid/1607/articleID/243158/Default.aspx

7. New Zealand Herald (16/2/12, “Asset sell-off ‘guess work’ keeps the Buyers Guessing”, John Armstrong). Retrieved from http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10786121

8. The Pundit (6/2/12, “Lawnmower Treasury says it’s time for a Trim”, Tim Watkins). Retrieved from http://www.pundit.co.nz/content/lawnmower-treasury-says-its-time-for-a-trim