February 23rd 2002

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Articles from this issue:

COVER STORY: New Zealand's Economic U-Turn

Reality finally bites Democrats' leader

Family First rises, Democrats fall, in South Australia poll

2002 NCC National Conference - Building the Movement

Straws in the Wind: Andersen's Fairy Tales / Flying / Out of Africa

New Zealand to vote on new Constitution?

Bioethics: Cloning concerns must be addressed

Letters: "Booming" economy?

Letters: Politics to blame

Letters: Hot air

Letters: True ALP position

Media: Cross-media ownership laws / Negative coverage?

United States: Is the terrorist threat being politicised?

Economics: Privatisation - essential component of globalisation

Law: Abortion link to breast cancer victory

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Economics: Privatisation - essential component of globalisation

by Colin Teese

News Weekly, February 23, 2002

Privatisation - that is to say the sale of publicly owned assets to private interests - is indissolubly linked with the notion of free market economics. If you like, it is the second leg of a ’double’ - the other leg being free trade in goods and services. In short, privatisation is an integral part of the drive towards what the world has called - somewhat inaccurately - globalisation.

Nevertheless in recent economic discussions, not merely in News Weekly, but in the whole range of journals and newspaper articles where economics is discussed, privatisation is the aspect of globalisation rarely discussed.

Neither the justification for it, the movement towards it, nor the outcome has hardly ever been seriously considered. (This excludes an analysis of how it was done, in a book called Privatisation, Globalisation and Labour edited by a number of academics.)

This article is an attempt to examine the largely neglected issues, both for purposes of enlightenment and analysis.

But first a bit of background. From the time of the industrial revolution development has proceeded according to certain principles - not by accident, but out of necessity. Industry based societies rely heavily, for their development and growth, on mass consumer demand.

With the possible exception of railway systems in particular countries, development of consumer demand into new areas has always been preceded on the basis of a publicly funded infrastructure. (Rail systems, at least in the early days, could sometimes be developed privately where the infrastructure required was technically uncomplicated and therefore cheap to construct, where the rolling stock was self-propelled, and, most important of all, where traffic densities, relative to distance, were heavy.)

Mass production aimed at satisfying consumer demand for cheap goods, began in factories which were self-propelled by steam. There was no scope, under that system for the power needed to fuel factory output to be distributed from a central point. Nor was it necessary for factories to contemplate investment in costly and technically complicated equipment to supply their power needs.

But there were limits to how far this system could take the production of cheap consumer goods.

And, in any case, the development of electricity as a power source changed all that.

The availability of a low cost, more convenient form of energy to drive industrial production units was a great leap forward. Electric power allowed industrial production to grow more rapidly and to generate far greater profits than ever before.

For the most part, the generation and distribution of electric power, was considered to be the responsibility of government. That this should have been the case was no accident.

Nor was it because any of the industrializing countries (in the days before the Soviets) were anti-capitalist. Quite the opposite.

The reason was that the cost of building electricity generating and distributing facilities, was extremely high, the returns relatively small, and only realizable in the longer term.

Quite simply, compared with other forms of investment, power generation and distribution was an unattractive investment for what we would today call ‘venture capital’.

It was left to governments to provide finance and sometimes, build on their own behalf, electricity power generating and distributing systems. Governments usually borrowed for this purpose through the existing banking system.

Banks would have been hesitant to lend to private enterprise for this purpose, because of the high risks involved, and the relatively low returns. They were, however, happy to accommodate governments with long-term loans at low interest rates.

For two reasons: first the projects were rock solid secure - they were backed by government guarantee. Second, and here the banks did not like the idea, but they knew, that if they did not lend for this purpose governments could and would finance the projects on their own initiative.

Either from bond issues or later, as they developed an ever greater capacity to generate tax revenues, from taxation.

Thus governments assumed responsibility for what we now call infrastructure development; by necessity. Not to do so would have slowed the rate of growth of industrial development.

Government involvement in infrastructure development, of course, extended far beyond electricity generation. It encompassed gas production and distribution, railways, as already mentioned, and later roads and telecommunications.

In fact, almost all projects which furnished necessary services for the best functioning of the private enterprise economy, but which were not, themselves, capable of generating, large profits in the shorter term, came to be owned and operated by governments.

There was another important point which made it essential that infrastructure projects remained solely in government hands. By their nature, they did sat uncomfortably within the competitive framework which was considered to comprise the essential element of capitalism.

Infrastructure projects were long considered natural monopolies. They delivered an undifferentiated product or service. As such they could only compete on price. Price competition is difficult with infrastructure projects. Most of their operating costs are fixed. To reduce prices in response to competition, will inevitably lead to a price war.

In the process, because most of the costs accumulated in an infrastructure project are unavoidable, if a proper service is to be delivered, then cost reductions brought on by competition will always result in a decline in the quality of service.

In the case of public utilities like power generation and distribution, transport and communication services by way of examples, price competition which diminished the quality of the service, would do more than inconvenience consumers. Its effects would flow adversely through the entire economy.

Reliable delivery of essential services is absolutely critical to the proper functioning of what is sometimes described, inaccurately, as the productive side of the economy.

Accepting all of this it was further argued that since they were providing an essential service that was best and most efficiently provided by one operator; in private hands that monopoly advantage might well be exploited.

Consumers obviously could not look elsewhere for a lower cost provider. A government monopoly was judged the best means of delivering reliable service at the lowest possible price.

So what led to a revision of that view and gave rise to the opinion that private enterprise could provide the service cheaper and better? In fact that is where globalisation and the idea of unfettered market capitalism enter the debate which will be considered in the next issue of News Weekly.

  • Colin Teese, former Deputy Secretary of the Department of Trade

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