Privatisation: Australian and New Zealand Experience (or, how the Kiwi beat the Kangaroo)

Vol. 5, No. 4

SUMMARY

Sales to the private sector of assets of Commonwealth and State governments have amounted to only about $6 billion over recent years.  Meantime, the total estimated value of assets of major government business enterprises increased by about $25 billion to $126 billion over the two years ended June 1992.  This slow pace of privatisation in Australia compares with government asset sales to 1992 of about $NZ11 billion in New Zealand (whose economy is smaller than Victoria's), which has been cited by both the World Bank and the IMF as a country which has benefited from properly-executed privatisations and which serves as a model for other countries.  Improved efficiency following privatisations has contributed to the recovery of the NZ economy.

In Australia the public sector (and the business enterprise sector in particular) have been "captured" by the union movement, which has strongly opposed privatisation because that would reduce its power base.  This, and the close association between the unions and the Labor Party (which dominated governments in Australia in the 1980s), explain the slow pace of privatisation.  The more extensive NZ sales reflect the seriousness of that country's debt problem and the recognition that privatisation was part of the response needed to improve competitiveness.  While Australian governments have secured significant productivity improvements through the "corporatisation" of business enterprises, NZ experience suggests that corporatisation leaves too much scope for political interference and inhibits efficiency gains.  Changing the ownership of assets is also important.

The one bright star on the Australian horizon is the Victorian Government, which has indicated an intention to "unbundle" the assets of its enterprises and sell them to the private sector where this is perceived as benefiting the public.  The proposal by the Commonwealth Government to sell only a further 19 per cent of the Commonwealth Bank (leaving the Government with majority ownership) has no economic justification given the deregulation of the banking industry.

AUSTRALIA

Australia's Labor Party is fond of pointing out that Australia has one of the smallest public sectors amongst OECD countries.  On the latest available count (1989) only Japan and Switzerland had total government outlays that were a lower proportion of GDP than Australia's 36 per cent.  The comparable OECD figure for the UK was 41 per cent, with Sweden at the top of the league on 60 per cent.

Now that the Australian Prime Minister, Mr Keating, is putting so much emphasis on the need for Australia to have closer links with Asia, perhaps his Labor Government will also pay closer regard to the relationship between the superior economic performance of most Asian countries and their smaller government sectors.  That aside, it is also necessary to take account of the fact that measures of government outlays relative to GDP do not fully reflect the potential importance of government business enterprises in an economy.  In 1990-91, government business enterprises (GBEs) controlled and operated nearly 20 per cent of Australia's capital stock or nearly 40 per cent of the business sector capital stock.  This is amongst the highest proportion of capital stock controlled by the public sector in OECD countries and it reflects a long history of state socialism in Australia and, most particularly, the State of Victoria.  With some exaggeration, one 1932 study described Victoria's public services as "the largest and most comprehensive use of State power outside Russia". ⁽¹⁾

One recent paper on privatisation claimed, however, that Australia is now fortunate in being able to draw on the experience of privatisation elsewhere.  What it might equally well have said is that Australia is unfortunate in having been one of the slowest to move down the privatisation track!

A rough indication of the relative efficiency of the public and private enterprise sectors can be obtained by comparing net returns on capital stock.  (Many public trading enterprises, of course, have to meet community service obligations which reduce their rates of return.)  In 1991-92, the net rate of return on the capital stock of private trading enterprises was 14.9 per cent, about 2.5 times higher than the net return on the capital stock of public trading enterprises.  Here is at least one reason why the growth in Australia's GDP per head was slower than the OECD average during the 1980s.

The reasons for the slow progress on privatisation are not difficult to find.  After one judge recently criticised the increasing privatisation of jails on the ground that it was taking Australians back to the time when private contractors who were responsible for shipping convicts from Britain allowed large numbers to die en route (this problem was solved, apparently, by paying contractors on the basis of the number arriving in Australia alive!), one might be excused for thinking that it is a reflex response to developments in what used to be described as the "home country"!  (In fact, Australia is ahead of Britain in privatised jails, with two now operating in Queensland and one in NSW, covering 8 per cent of prisoners.)

More importantly, however, the public sector and the GBE sector in particular have been the main home of the trade union movement, which "captured" the operations of GBE's a long time ago and has been desperately trying to hang on ever since.  Nearly 70 per cent of Australia's public sector is still unionised and there is a heavy concentration of membership amongst public enterprises.  This provides a striking contrast with the private sector where unionisation is now down to around 30 per cent.  A number of union leaders have been mounting a rearguard action to retain public ownership and thus preserve their positions of power and influence.  With Labor Governments in office at the Federal level and in a majority of States during most of the 1980s it is scarcely surprising therefore, given the close association between Labor and the union movement, that Australia has been dragging the privatisation chain.

Reality, however, has a habit of breaking in now and again.  The emergence of a serious external debt problem, and a serious government debt problem in Victoria, have contributed to an important change in attitude amongst both Federal and State Labor Parties in particular.  Indeed, Victoria's serious debt problem was perhaps the major factor in the decision by the Victorian Labor Government in 1990-91 to sell the State Bank of Victoria when the Bank and its subsidiaries accumulated losses that required the Government to provide financial support of $2.7 billion.  At all events the decision was taken most reluctantly and, in order to smooth the passage through the Party room, the Bank was sold to the Federal Government's own bank, the Commonwealth Bank, for $2 billion (including $400 million compensation for the loss of tax revenue), even though the Victorian Government reportedly received a better offer from a private sector bank.  This was what some might describe as a Clayton's privatisation, an exercise repeated by the State Government when it sold the State Insurance Office to the NSW Government Insurance Office in 1992 for about $200 million.

State debt has also been a factor in the recently-announced decision of the South Australian Labor Government to sell its State Bank, or at least the "good" part of it that is left after a large volume of bad debts (over $3 billion) was taken over by the State Government itself.  The Commonwealth Government helped the State Government make up its mind by offering during the March 1993 Federal election $600 million in (over-) compensation for the loss of tax revenue to the South Australian Government on condition that they sell the Bank.  This was generally regarded as an attempt by Prime Minister Keating to help win back some seats in South Australia, although if so, it was not, in the event, notably successful.

To round out this part of the story, however, I should mention the other privatisation ploy that has been widely adopted in Australia, that is, "partial privatisation".  This is what happens when senior ministers think that the sale of a government enterprise is appropriate and desirable, and would like some money to help finance the published budget deficit, but when the Party rank and file and the relevant unions are opposed.  The outcome is a compromise involving the float of part of the capital of the enterprise.  This is what happened with the Federal Government's Commonwealth Bank, where the then Federal Treasurer, Mr Keating, used the acquisition of the State Bank of Victoria as a convenient justification to float off 30 per cent of Commonwealth Bank capital to the private sector.  (The $1.3 billion float in September 1991 was at the time the biggest ever public share issue in Australia.  It was heavily over-subscribed and the shares went immediately to a 20 per cent premium on their issue price.)  A further 19 per cent is now to be floated to the market, thus leaving majority government ownership in the Bank.  The rationale for such a policy in a deregulated and competitive banking industry has more to do with history, particularly the deeply distrustful relationship between the private banks and the Labor Party, which blamed the 1930s recession on those banks and which sought to nationalise them after World War II, than with economic sense.

Other partial privatisations planned include the Government's merchant "bank" (Australian Industry Development Corporation) and shipping company (Australian National Line).

Of course, it can be said that progress has been made in as much as senior Federal Labor Ministers have now accepted that government assets are not intended to be held in trust in perpetuity.  Following the external debt "crisis" of 1986, there was an increased realisation that Commonwealth enterprises needed to be able to provide services on an internationally competitive basis and that this would require substantial additional amounts of capital from the budget, the provision of which was perceived as competing with other budgetary requirements.  There was also a realisation, moreover, that the enterprises would not perform, and the provision of additional capital (whether from the budget or otherwise) could not be justified, unless their structure was changed.

The Commonwealth Government then moved to establish a Task Force on Asset Sales within the Department of Finance and a programme of "major" asset sales began in 1987.  In addition to selling 30 per cent of the Commonwealth Bank, important sales of Commonwealth assets have included the sale of Aussat, the national domestic satellite operator, to Optus Communications.  This "trade" sale, which produced no net return after paying off Aussat's debt, was part of the Government's strategy for introducing competition into the telecommunications industry through the establishment of a strong second telecommunications carrier and which, the Government argues, precludes the need to privatise Telecom (now AOTC).  The stated intention is to open the AOTC/Optus duopoly to full competition in 1997.  (Optus, which is 51 per cent Australian owned, with an American and British company holding the remaining 49 per cent, recently commenced a long distance call service and phone users have started to vote on which enterprise they wish to carry their long-distance calls).

There has also been another Clayton's sale involving the sale of the government-owned domestic airline, Australian, to the majority-government-owned international airline, Qantas.  The announced intention there, however, is to float off the remainder of the merged airline, Qantas, 25 per cent of which has already been sold to British Airways.  (The sale of 25 per cent of Qantas to British Airways as a "trade" sale is stated to have been to capture a premium from strategic investors and to create a close alliance with an international "major".  Foreign ownership of Qantas is limited to 35 per cent overall and 25 per cent for one entity.)  The merger of the two government-owned airlines was also accompanied by the opening-up in November 1990 of the domestic aviation market to greater competition, and the development of a single aviation market with New Zealand.

Between 1987-88 and 1991-92, total receipts from Commonwealth Government asset sales were about $4.4 billion, of which $1.5 billion represented the sale of a portfolio of housing loans provided to defence personnel on a subsidised basis and $1.3 billion the 30 per cent float of the Commonwealth Bank.  (This $1.3 billion was actually retained by the Commonwealth Bank as capital to help finance, in effect, the aforementioned acquisition of the State Bank of Victoria).  The $4.4 billion may be compared to total Commonwealth budget revenue over the 5 years of about $457 billion and total estimated assets of major Commonwealth GBEs of $39 billion (excluding the Commonwealth Bank) at June 1992, nearly $5 billion higher than two years earlier.

Given the strong involvement of the unions in the public sector, the close association between the unions and the Labor Party, and the long history of government involvement in the provision of "basic services" the course pursued in regard to Commonwealth GBEs is probably about the best that could have been expected with a Labor Government at the Federal helm since 1983.  Their exposure, or at least greater exposure, to market disciplines (particularly through greater corporatisation and in respect of capital raisings) since 1987 has certainly led to considerable improvements in productivity and the unions have not been able to prevent the quite considerable "downsizing" which has occurred in that process.  The threat of privatisation has forced them into a reluctant acceptance of lower levels of employment and better work practices.  For major Commonwealth enterprises, employment fell by 13,000 or 6.4 per cent, between 1989-90 and 1991-92 even with the take-over of the State Bank of Victoria.

The acceptance by the Federal Government around 1987 of the need to increase GBE's exposure to market disciplines has been paralleled in the State Government sector, where nearly 70 per cent of all assets of major GBEs are located.  The resultant improvement in productivity has led to the situation that over the past 4-5 years productivity growth of GBEs generally has been considerably faster than for private trading enterprises.  This largely reflects the fact that the improvement has come from a low base.  (In its 1989-90 review of the Australian economy, the OECD estimated that productivity of Australian GBE's was about half the OECD average.)  Further gains may become increasingly difficult without a move to full privatisation, but there is, clearly, a strategy in some quarters of using the recent improvements as a basis for arguing against privatisation.  In particular, while the Federal Government's Economic Planning Advisory Council has acknowledged that there remains scope for substantial further improvements in GBEs' productivity, it has argued that the empirical evidence of the effects of privatisation is "scanty or ambiguous" and that the main thing is not change of ownership but the introduction of competition.  The establishment by Commonwealth and State Governments of a national performance monitoring framework to enable comparative assessments to be made of the performance of GBE's, while putting pressure on enterprises to sustain improvements in the efficiency and effectiveness of service delivery and customer responsiveness, also provides a basis for resisting privatisation through a policy of "reform from within".

In the State sector there is, if anything, stronger union opposition to privatisation than in the Commonwealth sector, with the result that there has been little in the way of full privatisations of major State enterprises, whose assets totalled $87 billion at 30 June 1992, over $20 billion higher than two years previously.  (This increase includes some substantial revaluations of assets.)  The focus there has also been, rather, on improving the efficiency of existing enterprises.  This has led to reductions in employment in major State enterprises of about 18 per cent between 1989-90 and 1991-92 and, as noted, to a considerable improvement in productivity.

Apart from the State Bank of Victoria, the largest State Government privatisation to date has been the public float last year by the Liberal/National Government in NSW of the Government Insurance Office, yielding the substantial sum of $1.2 billion.  This float, also heavily oversubscribed, was more keenly priced than the Commonwealth Bank float and the shares went to a discount for a time.  Although it has failed to live up to the early prospect it held out for considerable privatisation, the NSW Government has used the build-own-operate model to have the private sector finance and operate some major toll roadworks and has also undertaken a couple of other important minor privatisations, as well as making greater use of contracting out generally.  Perhaps the most interesting minor privatisation was the 1990 franchising, under a 20 year lease arrangement, of the Port Kembla Coal Loader.  Under private management:

• industry costs per tonne for ship loading fell from $5.58, when the loader was operated by the State-run Maritime Services Board, to $4.50 by June 1991;
• average vessel time at berth fell from 49.4 hours for 1989-90 to 42.3 hours for 1990-91, even though the average vessel load increased by over 10 per cent;
• average ship loading rate increased from 1980 tonnes per hour for the previous three years to 2,440 tonnes per hour for 1990-91.  A record ship loading rate of 4,287 tonnes per hour was achieved in May 1991;
• gross ship loading rate (actual ship loading rate/design ship loading rate) improved from 30.5 per cent in 1989 to 39.25 per cent in 1991;
• the number of employees fell from 390 in 1990 to 221 in 1992;  and
• average vessel turn-around time improved from 9.6 days in 1990 to 4.8 days in 1991. ⁽²⁾

After 5 years in office, the present NSW Government continues to have its own bank, though there remains a stated intention to privatise that institution when the market is judged to be "right".  Interestingly, the only State without a bank, Queensland, has come through the recession relatively unscathed.  The existence of government-owned and -guaranteed banks, which still control 30 per cent of the assets of the Australian banking system (the 30 per cent figure includes the Federal Government's Commonwealth Bank which was, however, a moderating influence during the 1980s, partly reflecting the fact that its Chief Executive during the crucial period was a former Deputy Governor of the Reserve Bank) has created a potential moral hazard problem of some magnitude in the deregulated market.  Indeed, the State banks played a leading role in the over-lending that occurred in the latter part of the 1980s.

THE OUTLOOK IN VICTORIA

Probably the most interesting and important recent developments in Australian privatisation are those emanating from the Victorian Liberal/National Government, elected in October 1992 after a decade of Labor Governments which left the State with a serious debt problem, reflected in the fact that nearly one quarter of the State's revenue is now required to meet (net) debt servicing.  The "capture" by unions of the operation of a wide range of the State's services, leading to overstaffing and restrictive work practices, was the major factor in the emergence of this debt problem.  It has provided both the need and the opportunity to implement a wide ranging programme of privatisations in various forms.  That programme is only just getting under way and it is too early to make any definitive assessment of it.  The following features of the programme are, however, worth mentioning:

• The contract for partial privatisation of one electricity generation unit entered into by the Labor Government with a US company has been re-negotiated to increase from 40 per cent to 51 per cent the holding of the US company in return for less restrictive (from the Government and consumer viewpoint) conditions in the "take-or-pay" contract for electricity supply for over 30 years;
• A State Owned Enterprises Act has been passed which effectively centralises the control in the hands of the Treasurer of the restructuring of all major State enterprises, whose assets were valued in excess of $31 billion and which employed 26,000 people at 30 June 1992.  The Treasurer has indicated that the Government intends to undertake a major "unbundling" of the assets of these enterprises and their sale to the private sector wherever there is a competitive environment or where one can be created.  The sale by tender has already been undertaken of the Gas and Fuel Corporation's LPG gas distribution arm (Heatane) for a surprisingly high $130 million.  (Reports suggest that the private purchaser has estimated that it may require only about one half of the staff previously employed.)  While the State Government will lose $6 million per annum in revenue from dividends, according to the State Treasurer it will save $14 million per annum from debt retired with the proceeds.  (Within 10 days of the announcement of the success of this sale the NSW Government announced that it intends to make a statement "clarifying" the State's privatisation principles, objectives, processes and programme.  According to a Government spokesman "The Government never really had a privatisation policy and this (statement) will be weighty".) ⁽³⁾
• Action has also been taken to privatise the operation of 3 regional railway lines under a franchise agreement that is expected to significantly reduce the cost of travel to the consumer.  (Reports suggest that West Coast Railways will require less than one half of the staff previously employed.)  In addition, private bus companies have won contracts to supply services to country towns affected by the closure of 3 regional rail lines, and the operation of 5 urban railway stations is to be franchised.
• The State Government has stated that the main objective of any moves to privatise will not be to provide budgetary relief but to maximise product market competition and consumer choice with a view to benefiting both households and industry.  The Treasurer has emphasised that he will not be deterred from a privatisation simply because there may be a net increase in the budget deficit.  All privatisation proceeds are to be used to retire State debt, not to reduce the on-going budget deficit, except through any net interest savings.  (The possibility of a net increase in the budget deficit arises because the Labor Government used some GBEs as milch cows in regard to both debt and "dividends".)
• It is evident that the Government intends to put considerable emphasis on the unbundling of the State's electricity enterprise (SECV), whose assets are around $11-12 billion.  However, other areas where the whole or part of an enterprise's assets seem likely to be sold or franchised include gas, compulsory third party insurance, water, ports, aluminium smelting (25 per cent interest), totalisator betting, the transport/ storage of wheat, the provision of housing for government employees, and the theatre/ concert ticket agency (which, believe it or not, is owned by a Government agency).
• Where judged appropriate, there will be regulation at the State level to protect consumers from the exercise of restrictive practices.

The Victorian Government is also currently taking into account in framing its policies a major report ⁽⁴⁾ analysing the State's financial situation and the future role of government in the provision of other services such as health and education.  This report, the most comprehensive and authoritative ever undertaken of a State Government's efficiency and role, has made strong recommendations that, in order to reduce the capture problem and to introduce a competitive environment, the State Government adopt the so-called purchase/ provider approach wherever practicable and, in particular, in the provision of health services.  The report's proposals include the privatisation of most of Victoria's public hospitals and nursing homes, and the funding of government schools on a per-student basis (with additional funding on a needs basis), with schools being encouraged to compete for students.  The Government has already taken some steps towards the latter objective by, inter alia, devolving considerable responsibility for managing the finances and staffing of a large number of government schools to school principals and school councils.  It has also announced that funding for public hospitals will now be provided on a case-mix basis and that hospitals which cannot meet the funding standard will be closed.  In a statement of 30 May, the Minister said "no provider will enjoy automatic and perpetual rights to public funding.  Those rights will be earned either in continuous and open competition or -- where competition is not technically possible -- through periodic contests for franchise".

It remains to be seen how far the Victorian Liberal/National Government will be prepared to go in reducing the role of government as a provider of services through various forms of privatisation.  The opportunity certainly exists for radical change to be implemented and a good start has been made.  The Government has, however, a good deal more work to do in persuading the electorate of the potential benefits of privatisation.  Notwithstanding the demonstrably poorer performance of the government sector in delivering services, there remains considerable community reluctance to see "basic services" in the hands of the private sector.  This reluctance was reflected in a recent survey by the NSW Water Board of attitudes towards its possible privatisation, which revealed that a majority of people believed it would be "dangerous to let a basic necessity such as water go into private hands", that privatisation of the Water Board would be perceived as a "one-off quick fix", and that privatisation is "linked with a political ideology which many people oppose or suspect deeply". ⁽⁵⁾

NEW ZEALAND

New Zealand's slightly earlier start than Australia down the corporatisation/privatisation track -- about the mid-1980s -- largely reflected the earlier recognition of the seriousness of that country's external debt problem, and the considerably greater extent of that problem.  That, in turn, reflected to an important degree the inefficient use of a substantial proportion of the nation's capital by state trading enterprises, which by the early-1980s accounted for about 20 per cent of annual gross investment (including investment in housing).  The state trading enterprise sector then included heavy involvement, extending up to 100 per cent in some cases, in the following areas:

• Banking and insurance;
• Telecommunications;
• Electricity;
• Oil, gas and coal;
• Rail, buses, ferries, airlines, shipping, airports;
• Television and radio;
• Forestry;
• Tourist hotels;
• National parks;
• Urban and rural property investment.

All significant strategic, pricing and capital expenditure decisions of the state enterprises were taken at a political level and trading departments had little delegated authority.  Managerial accountability for decisions was therefore largely absent.

The process of structural reform of the state sector in New Zealand commenced in the mid-1980s with the corporatisation of a number of state owned enterprises (SOEs) in which responsibility for non-commercial objectives was removed from SOEs, which were then required to operate as successful businesses.  The SOE model, which was designed to force major efficiency gains while maintaining government ownership, led to considerable improvements in efficiency.  A key feature was the appointment of top quality commercial expertise to the governing boards of those organisations.  Without those appointments, and the Government's firmly indicated intention to expose the enterprises to competition, the productivity gains would not have been achieved.  The injection of a commercial orientation became to an extent self-fulfilling, progressively infecting the attitudes of all senior staff.

A recent publication of the New Zealand Business Roundtable ⁽⁶⁾ listed the following gains from the corporatisation strategy:

• clearer objectives, with more effective monitoring and accountability mechanisms to ensure their attainment;
• a greater consumer focus, resulting in an increased and/or improved range of products and services;
• increased productivity with the same or fewer staff (often accompanied by a shift towards contracting out of services not economically provided internally);
• cost reductions, which flow through to lower real prices for consumers;
• improved remuneration structures, enhancing the ability of SOEs to attract the skills required for successful operation;
• vastly improved profitability;  and
• the establishment of more effective management information systems.

Examples of gains by individual SOEs up to June 1992 include:

ELECTRICITY CORPORATION (1987)

Average wholesale electricity prices were reduced in real terms by 13 per cent despite a 187 per cent lift in profit after tax (to 1990-91).  This reflected an increase in productivity of 71 per cent, as reflected in a reduction in staff numbers from 6,076 in 1986 to 3,366 in September 1991.

NEW ZEALAND POST (1987)

In the first 4 years of operation the price of a standard letter remained at 40 cents despite a rise in the GST from 10 per cent to 12.5 per cent;  staff levels decreased by 30 per cent and the return on shareholders funds averaged nearly 30 per cent per annum (falling to an estimated 15 per cent in 1991-92).

NZ RAIL (1987)

By comparison with the early 1980s, freight rates have roughly halved and productivity has quadrupled.  Staff was reduced from 21,600 in March 1982 to 5,100 and wagon numbers dropped from 28,000 to 9,500.  Now one of the world's few profitable State-owned railways, earning a profit of $NZ40.2 million in 1991-92 (but after an injection of government capital of $NZ360m and the writing off of $NZ1.1 billion in debt in 1989).

TELECOM (1987)

The average real price of a basket of local, toll and international calls was cut by 40 per cent between 1986 and 1992 and, despite the introduction of charges for local calls, overall phone costs to business dropped by 40 per cent.  Employment was about halved from 26,000 in 1987 and competition introduced in practically every aspect of services.  (Clear Communication Ltd started private network services in December 1990, toll bypass in May 1991.)

However, notwithstanding these gains from corporatisation, the distinguishing feature of New Zealand's structural reform of the SOE sector has been the extent and comparative success of full privatisation.  While the privatisations have not all been implemented smoothly, the World Bank and IMF have independently cited New Zealand as a country which has benefited from properly executed privatisations and an IMF publication commented that "the case of New Zealand ... is particularly instructive for other countries contemplating ... a privatisation programme". ⁽⁷⁾  The publication drew particular attention to the greater success of full privatisation rather than partial privatisation and the superiority of open bids for purchase compared with sharemarket sales.

Funds raised from government asset sales to 1992 totalled about $NZ11 billion (see attached list for details), equivalent to almost 25 per cent of net public sector debt.  According to one study, the privatisation programme was about two-thirds completed by 1992. ⁽⁸⁾  The latest privatisation is that of New Zealand Rail, sold for $NZ400 million to a consortium led by the largest regional freight operator in the US.

According to the NZ Business Roundtable, the key gains identified as arising from privatisation are that:

• privatised entities have more flexibility to plan strategically;
• conflicts arising over strategic direction between managers and the new owners are resolved by non-controversial means -- recourse to the managerial labour market;
• the companies are no longer constrained by the government's inherent risk-aversion and fiscal constraints (as shareholder) in their pursuit of strategic opportunities;
• privatisation provides the opportunity for the organisation to implement competitive incentive-based remuneration packages, including the possibility of (much sought after) equity-based components, free from undue public (including competitor) scrutiny;
• the new owners typically provide the company with access to superior management, marketing and production systems, and the freedom and ability to obtain these externally if required.

Given a competitive market, consumers benefit from such gains in terms of lower prices and/or improved and increased choice.

Clearly the crucial features for improved performance extend far beyond putting competent directors on boards, which is sometimes advocated as a sufficient remedy for inferior public enterprise performance.  Most of the important incentives and sanctions which influence performance simply cannot be replicated under public ownership. ⁽⁹⁾

The benefits from the privatisation of NZ Telecom are reflected in its results for the financial year ending March 1993.  These showed that, even after reducing toll prices by 25 per cent over the last 3 years (saving $NZ440m to the consumer), with no local call charges and even with residential access charges now 35 per cent lower than in Australia and 54 per cent lower than in Britain, the company was able to earn about the same profit as in 1991-92 (excluding a one-off restructuring charge) and pay an increased dividend.  Telecom's staff is expected to be down to 7,500 by 1997.

By contrast, there has been considerable dissatisfaction with the constraints imposed on those SOEs remaining corporatised.  In particular, difficulties have arisen in regard to:

• the inability of some SOEs to resolve (with their shareholding ministers) questions of strategic direction;
• the ongoing friction between a number of SOE boards and the government (and even direct political intervention) over commercial decisions;
• the politicisation of SOE remuneration decisions;  and
• the issue of commercial neutrality and the implicit government guarantee.

A consequence of these difficulties is the likely erosion of (at least some) of the gains achieved through corporatisation in these cases. ⁽¹⁰⁾

CONCLUSION

Since the mid-1980s there have been extensive structural reforms in government business enterprises in both Australia and New Zealand involving varying degrees of separation of management of the enterprises from Ministerial control/direction.  The adoption of commercial objectives and the exposure of the enterprises to market disciplines of various sorts has led to very considerable improvement in terms of price and quality of service to the consumer, as a result of productivity gains and a new customer orientation, once the capture of the enterprises by unions and other interest groups was challenged and moderated.  The fact that New Zealand has led the way, particularly in regard to full privatisations, has contributed to the apparently stronger recovery in that country's economy, albeit from a lower base, and in business confidence.

However, in both Australia and New Zealand there has been -- and remains -- a reluctance to move to full privatisation.  In a number of cases this is inhibiting the potential for further gains in efficiency which both countries need if they are to make the necessary further improvements in international competitiveness and in living standards.  In Australia, the failure, particularly by important research bodies such as EPAC, to recognise the potential benefits from, and importance of, a change to private ownership of assets reflects, inter alia, an Australian proclivity to "look to Government" as the "normal" provider of basic services and a failure by the business sector (in particular) to expound the virtues of private enterprise.  There are, however, some signs that this may be changing.  In particular, the new Liberal/ National Government in Victoria has indicated that it has an appetite for reform and the economic and financial circumstances which it inherited provide an opportunity to set an example which could speed up the process of privatisation and extend it in ways that could significantly change the role of government, improve economic efficiency and contribute importantly to the State's economic recovery.

Attachment
New Zealand -- Sales of State Enterprises and Assets (to 1992)

Business	Sales Price ($M)	Settlement Date	Purchaser
NZ Steel	327.2	1988	Equilicorp NZ investment co. (90%) (resold to BHP et al)
Petrocorp	801.1	1988	Fletcher Challenge, NZ conglomerate
Health Computing Services	4.3	1988	Paxus Information Services, NZ Computing coy.
Development Finance Corporation	111.3	1988	National Provident Fund, NZ Superan. coy, (80%) Salomon Bros. (20%) (DFC now under statutory management)
Post Bank	678.5	1989	ANZ, Australian irading bank.
Shipping Corporation	33.8	1989-90	ACT (NZ) Ltd., Committee, UK shipping coy.
Air New Zealand	660.0	1989	BIL, NZ investment coy. (65%) Qantas(19.9%) Japan Air Lines (7.5%) American Airlines (7.5%) (30% of BIL's holding now on-sold)
Landcorp (financial instruments)	77.0	1989-90	Mortgagees
Rural Bank	550.0	1989	Fletcher Challenge, NZ conglomerate
Government Print	35.0	1990	Rank Group, NZ printer
National Film Unit	2.5	1990	TVNZ, NZ SOE
Communicate NZ	0.1	1989	DAC Group
State Insurance	735.0	1990	Norwich Union Holdings, UK coy.
Telecom NZ Ltd	4250.0	1990	Bell Atlantic Ameritech	}	US telecommunications coys. (90% now sold down)
			Fay Richwhite Freightways	}	NZ coys. (5% each)
			(30.8% now pubiicly floated).
NZ Liquid Fuel Investments, Maui Gas, and Synfuel stocks	80.2 *	1990	Fletcher Challenge et al.
Export Guarantee Lid	16.3	1990	State Insurance, an ex-SOE
Tourist Hotel Corporation	71.8	1990	Southern Pacific Hotels. US coy.
Forestry Corporation (cutting rights)	1393.0	1989-92	Assorted local and offshore coys.
NZ Railways Corporation (bus services)	17.5	1991	Co-operative of NZ operators.
Housing Corp Mortgages	530.0	1991-92	TSB Bank Ltd, Postbank, Mortgage Corporation of NZ
Government Supply Brokerage Corp	3.2	1992	Professional Services Ltd
Bank of New Zealand	+	1988	Fay Richwhite, NZ Merchant bank (26%) (58% still government-owned, 16% publicly floated)
	1000.0	1992	National Australia Bank purchases government share.

Tne sale of Transpower, further forest cutting rights, and Housing Corporation mortgages is now under way.  Studies of the feasibility of selling NZRail, Landcorp, Government Computing and Wordscorp are unoer way.  Furthermore, in the local authority sector, the disposal of local supply authorities and some shareholdings in Port, Airport, and other companies is now under way.

Note there have also been sales of usage rights to oil, gas. minerals, water, airwaves, and fish resources.

* Government involved in further profit-sharing and ciawback arrangements.

+ BNZ initially not formally sold:  issues of new share diluted Government's shareholding.

Source:  From Duncan and Bollard (op. cit.) who give their sources as SOE office, NZ Yearbook, R.C Mascarenhas, The Treasury.

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ENDNOTES

1.  Eggleston R., State Socialism in Victoria, P.S. King and Son Ltd., London, 1990.

2.  Draft Industry Commission Report on Ports, 1992.

3.  Australian Financial Review, 25 May, 1993.

4.  Commission of Audit, April 1993.

5.  As reported in the Sydney Morning Herald, 29 March 1993.

6.  "The Public Benefit of Private Ownership:  The Case For Privatisation", June 1992, page 13.

7.  S. Jones, "The Road To Privatisation:  The Issues Involved and Some Lessons From New Zealand's Experience", Finance and Development, March 1991, page 39.

8.  Ian Duncan and Alan Bollard, Corporatisation and Privatisation:  Lessons From New Zealand, Oxford 1992

9.  Op. cit., pages 22-23.

10.  For a further elaboration of the problems which have emerged in NZ corporatised enterprises, see Duncan and Bollard, op. cit.