New
Zealand Deputy Prime Minister Jim Anderton
Address prepared for plenary
session Commonwealth Business Forum
Honoured colleagues and delegates, I'm reminded of
the old story about a surgeon, an engineer and an
economist discussing which profession has the longest
history. The surgeon said medicine was the oldest,
because when the Lord created Eve, he took a rib from
Adam¡Kthe first example of surgery.The engineer
pointed out that first came engineering when the heavens
and the earth were created from the chaos. And the
economist said, "yes, but who do you think created
the chaos.'
It is difficult to outline New Zealand's recent experience
of private-public partnerships without considering
the chaos that economic policy can wreak.In the mid-eighties,
the New Zealand government of the day began a programme
of privatisation.It was continued by successive governments
through to the election of the present Labour-Alliance
Coalition in 1999.In that time almost every configuration
of public and private ownership has been tried.For
many years, the term "public-private partnership'
was a code word for privatisation.
In New Zealand today, partnership in almost every
strategic sector is emerging because of a need for
the public sector to re-enter the frame.As far as
I am aware, no other country in the eighties and nineties
deregulated and privatised as far or as fast as New
Zealand attempted.In banking, electricity, telecommunications
and transport, to name a few, the public sector is
making a come-back.Attempts to create a market in
the electricity industry led, in 1998, to blackouts
lasting several weeks in our largest city, Auckland.The
industry was privatised first by handing out tradeable
share certificates to customers of local, community-owned
retail companies.The opportunity costs for many consumers
of holding a large, easily convertible share certificate
were obvious.Individual share-holdings were quickly
aggregated into privately-owned monopolies.Consumers
were encouraged to change electricity suppliers, and
then found it almost impossible to do so.Energy companies
couldn't put together switching agreements that ensured
electricity stayed connected, meters were read and
customers received bills.
As recently as this year, a national drive to reduce
energy consumption by ten per cent had to be launched
at the height of winter.The market failed to anticipate
demand and ensure adequate supply to meet it.As in
California, where similar reforms have been abandoned,
the policy has had to be revisited.Last year the Government
commissioned an inquiry which revealed the industry
is too fragile now to sustain another round of restructuring.
No one now seriously expects the electricity market
to deliver adequately in the foreseeable future.In
telecommunications, privatisation brought net disinvestment
in technology for most of the nineties.A near monopoly
firm was able to increase consumer prices every year,
even when the availability of new technology should
have been driving prices down.International comparisons
revealed New Zealanders paying very high sums for
line rentals, domestic and international toll calls
and mobile services.Another inquiry commissioned by
this Government found that the solitary weapon of
competition law alone was inadequate for optimal development
of the industry.Poor competitive conditions produced
poor investment decisions and unsatisfactory consumer
service.
More seriously, the prospect of non-metropolitan areas
falling steadily behind in the availability of broadband
services threatens the viability of entire regions.The
Government has responded by introducing industry specific
regulations.The Government is also again entering
the telecommunications sector, albeit in a minor way.We
are piloting broadband schemes in partnership with
local communities and telecommunications companies
aimed at ensuring all of New Zealand can harness a
digital future.In the mid-eighties, the public sector
owned four commercial banks.By the early nineties,
it owned none, and not a single major financial institution
was New Zealand owned.
Many parts of New Zealand lost banking services altogether.
Resentment at the level of bank charges rose every
year, as banks repatriated very high levels of profits
overseas.
The absence of any significant New Zealand-owned financial
institutions brought widespread further problems.
The flow of profits out of New Zealand seriously worsened
out current account deficit, at a time when it was
already critically impaired.
The loss of services from regional New Zealand undermined
the viability of those regions.
As banks left, so too other businesses would depart.
The new Government has responded by allowing the publicly-owned
New Zealand Post to establish a "People's Bank.'
The problems of privatisation have been most spectacular
recently in aviation.
In 1993 the Government of the day sold New Zealand
Rail.
Its purchasers this year announced an intention to
withdraw from passenger rail services altogether.
Rail services in many parts of the country are under
threat.
The Government has exchanged letters with Tranz Rail
on a possible agreement to re-purchase the Auckland
rail corridor.
In some parts of the country - such as the lower half
of the South Island - central government is offering
to subsidise services directly, in partnership with
local government.
Supporters of the market usually held out Air New
Zealand as a model of privatisation.
In 1988 Air New Zealand was sold to a consortium for
$660 million.
The Government of the day retained what was called
a "kiwi share'.
It ensured a majority of New Zealand directors on
the board.
The structure was designed to secure New Zealand's
bilateral landing rights.
As many of you will know, this glittering jewel in
the Crown of the market has fallen on hard times.
It purchased the major Australian airline Ansett last
year at too high a price.
In September, Air New Zealand was forced to write
off its purchase of Ansett, with a loss of $1.3 billion.
These circumstances have left the government with
little alternative but to take an active interest
in the future viability of an Air New Zealand, for
the wider good of the country.
The Government has, in the national interest, taken
an active was left with little realistic alternative
than to enter negotiations to provide financial support
for Air New Zealand.
One of the main criticisms we faced in deciding to
establish a People's Bank, was the problem of so-called
"moral hazard.'
This is the claim that a publicly-owned bank will
possess a market advantage because of the perceived
likelihood that a government will not allow its own
bank to fail.
I have never found this objection persuasive.
However, it's ironic in the New Zealand context.
We have just discovered that the moral hazard applies
equally to privately-owned investment in strategic
infrastructure.
Airlines, like railways, roads, telecommunications
and financial architecture are part of the cement
that enables the market to function.
They have to be there when you want to use them.
One of the theoretical strengths of the market is
its ability to clear away inefficient firms and replace
them with more efficient investment.
But New Zealand's experience has been that failure
of an infrastructural business has knocked over many
efficient businesses.
The Auckland power black-outs, for example, wiped
out many small businesses, and significantly dented
GDP.
The growth lost through an episode like that is never
recovered.
The New Zealand experience of industries such as aviation
and electricity has shown the benefits of collective
ownership sometimes outweigh the sum of individual
ownership.
Democratically elected power boards in Auckland may
well have made the errors that resulted in power black-outs
there.
But there is little doubt that the voting public would
have responded rationally at the next election and
"rationalised' the companies concerned.
In public ownership, Air New Zealand would almost
certainly not have bought Ansett Australia.
I am equally unenthused about the so-called half-way
house: private financing of public sector projects.
One example of that saw a local hospital board borrowing
to build a new hospital at a commercial interest rate
of around 12%.
The Crown could have borrowed the money for about
half that rate.
There are only two reasons why anyone would arrange
for hospital-borrowing at the higher rate.
One is that it hoped for improbably high productivity
growth achieved solely through the financing arrangement.
The other possible reason is poor organisation of
public finances, preventing capital from being raised
at the lowest rate available to the Crown.
One lesson is that demands for private sector involvement
arise where the public sector is doing its job poorly.
It would leave the wrong impression if I didn't also
examine examples of public sector failure.
In New Zealand in the late nineteen-eighties, a formerly
publicly-owned investment bank called DFC collapsed.
The reasons for its failure are illustrative:
- It received mixed messages about its role, having
been set up to fund regional and SME development and
then moved to financial speculation.
- It was run for too long as almost a public sector
department, rather than as a business.
- It had no idea of its cost of capital, because the
government of the day kept picking up its deficits.
The present government has recognised that sometimes
publicly-owned businesses have to be allowed to fail,
where alternative suppliers exist.
This year a State Owned Enterprise - Terralink - became
the first to be put into receivership.
The lessons of running a successful public enterprise
have been demonstrated by our Post Office.
NZ Post offers the cheapest standard letter rate in
the world.
It is highly profitable, it has a clear strategic
focus, strong management, good disciplines, and a
forward strategy including moving into banking and
expanding overseas.
The lesson is that public sector is not just public
- it also has to be enterprising.
The public sector cannot be successful where it attempts
merely to stand still and administer.
It needs to be accountable, innovative and adaptable.
It needs to make good investment decisions, have clear
objectives and it needs to meet the market.
In the case of the public sector, "meeting the
market' means meeting the needs of the wider public
who own it.
The New Zealand experiment saw the public sector attempt
to withdraw from investment in infrastructure.
The experiment largely failed.
Circumstance is bringing back the concept of public
enterprise.
The model being adopted in almost every case is one
of partnership with the private sector.
It is beginning to restore some balance to public
policy.
In my view it offers much brighter prospects for New
Zealand's overall economic development than we have
seen for nearly 25 years.
May 10, 2002.
[Source: New Zealand government,
October 3, 2001]
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