There has been a lot of commentary on asset sales around the place, so much so that I didn’t feel like I need to write anything.
Dim Post mentioned a lot of the people against asset sales and also Geoff Simmons recently wrote against them. Furthermore, both Anti-Dismal (*, *, *, *, *) and Roger Kerr (*, *, *) wrote a series of insightful posts regarding the issue.
On the left there seems to be an inherent bias against any selling at all – selling is bad. On the right there is an inherent bias against government ownership – government ownership is bad.
So, where do I fall on the issue? I have to admit that I am relatively in the middle – I see it as a case by case issue. There is nothing inherently wrong with privatisation, at all. Furthermore, I agree that generally privately run firms will “meet the market” more efficiently – implying that they either/both provide the same outputs more cheaply, provide more outputs for the same cost, and/or provide higher value outputs.
At the same time there is no doubt that some assets have social values/external benefits that are not captured by private agents. If the cost of indirect regulation (taxes and competition policy) is too high, it may be preferable for the government to run said agencies directly – I view it as direct regulation.
In New Zealand at the moment there is definite scope for opening up SOE’s to private sector investment – that is where we are sitting now. However, even given this I cannot go as far as Roger Douglas and say that the price does not matter – in fact, price is THE issue that the government should use when deciding whether to sell assets.
Why do I say this? I have already said that I believe that, in the absence of external benefits, the private sector is more than likely to run the organisation more efficiently. However, just because the evidence says this happens on average, and just because I have a value judgment that individuals are more responsive to incentives than government, isn’t sufficient to justify policy when we have prices available!
Effectively, a private purchaser will be willing to pay up to their reservation price for an asset. This reservation price will be based on the dividend yield they expect to get from the asset, and the relevant opportunity cost of investment.
At the same time the government know that, if it keeps hold of the asset, it expects to make some dividend yield from said asset through time. As a result, the government can price the asset – they can say they would not accept a bid below the discounted expected return from holding the asset.
If the government sticks to its guns, and a private sector agent is willing to pay MORE than this then we know that – ex ante – the private agent will be able to run the business more efficiently/add more value. This implies that the government SHOULD NOT sell for less than their discounted expected return (not the should, so I’m being all prescriptive 😉 ).
In essence, pricing the assets (including relevant external benefits) and then seeing what price people are willing to pay gives us information regarding what can be run more efficiently in house – and more efficiently in the private sector.
Looking backwards and saying “this business is paying dividends overseas, wahhh” or “this business ended up making more than what we sold it for, wahhh” is a rubbish argument against privatisation – but so is saying “the private sector is better, so give it the assets for free, wahh” is a poor way of justifying privatisation.
At the moment, the type of debate we are hearing in public sounds like the above quotes – and as a result the two sides appear to be talking past each other, making the debate feel more like ideology than reasoned analysis.
If we sat down and just explained the dividend example to people in society, I do not think they would be averse to a government stock take. The tough questions will then be “how do we value external benefits” and “what is the expected dividend yield” rather than is selling blanket good or bad.
Update: Anti-Dismal points out that there are other factors that need to be taken into consideration beyond the starting point of comparing dividend streams – that is why this is very much a case-by-case issue.
Update 2: I somehow missed this piece by Eric Crampton (even though I did check the site while writing the post).