Mostly it pays to privatise government enterprises

PROFESSOR Quiggin (AFR, February 1) suggests the Coalition's proposal to use part of the proceeds from the sale of Telstra to finance "normal government activity" means that the "main motivation for the partial sale ... is to make the Budget accounts look good".  However, while the proposal is an inappropriate departure from the most desired approach, it only involves using $1 billion out of $8 billion in this way, the remainder being used to retire debt.

The important question is whether, in the overall wash-up, the election proposals by the Coalition and the Government will result in the Commonwealth becoming a significant net contributor to saving in 1996-97.  That remains to be seen.  Achieving such a position will be important to restoring the confidence of the private sector in the capacity of the economy to sustain a higher growth rate.

Professor Quiggin also makes the remarkable claim that, other things being equal, "privatisation makes the public worse off" because the rate of return demanded by private holders of equity is much greater than the rate of return on government debt.

The fallacy in this reasoning is that it says the cost of borrowing should determine value.  Taken to its logical conclusion, it implies that the Government should own everything.  For example, consider the possibility of the Government purchasing, say, BHP.  Because the Government would be able to borrow at, say, 8 per cent, could it then "afford" to pay a much higher price than BHP's value in the market?  Of course not!  Imagine the outcry from (among others) Professor Quiggin if it did.

All assets, whether government or privately owned, should be valued by reference to what they generate, including what the market assesses as their prospective earnings (appropriately discounted).

There is no basis for a separate valuation of assets according to whether they are government or privately owned, although government-owned assets are likely to have a lower valuation because they are less efficiently managed and therefore generate less income/ benefits.

That is, essentially, why it generally pays to privatise government enterprises and why there have now been 15,000 privatisations worldwide.

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