19 May 2006 Lyttelton Port deal is a sign of wider development issues

Opinion editorial by Clive Smallman

The controversy surrounding plans to sell down shares in Lyttelton Port Company highlights a much deeper problem in cities and regions throughout the country. New Zealand faces major infrastructure constraints, reflecting an inability to attract and retain the large capital investments required. These constraints include an electricity distribution network under extreme pressure, major mobility problems in Auckland, Wellington and increasingly in Christchurch, an aged rail network with some ancient bridges and tunnels, and water and sewer systems due for replacement.

Many of these problems have been blamed on the economic reforms post 1984, short-sighted management, corporate neglect or political inaction. An underlying cause, however, is that New Zealand struggles to raise the capital needed to maintain a complex infrastructure. We need to remember that New Zealand is a country with just 4 million people to fund 11,000kms of state highways, 65,000kms of rural roads, 4000kms of railway tracks, 13 commercial ports and seven international airports, and much more besides.

The maintenance and renewal of these systems calls for the kind of capital which can not be easily raised internally or all at once. We are dependent on capital from abroad and have to live with the attendant uncertainties of global finance and economics. Capital can be attracted under the right conditions, but when conditions change it can take flight. Introduced capital also raises the issue of profits being repatriated to offshore investors and equity fund managers.

In proposing a part-privatisation, the owners of Lyttelton Port Co are trying to address some of these issues. Mayor Garry Moore contends that a deal with one of the world’s biggest port operators is the best insurance policy for the port and the region, and that without such a partnership the port could fail.

This response is familiar. In the past quarter of a century, governments and cities worldwide have turned increasingly to privatisation as a means of attempting to reinvigorate or refinance apparently ailing utilities.

Privatisation, or part-privatisation, is consistently justified as a means of introducing “market discipline” and its associated improvements in efficiency. For some it has become an article of faith that state-owned corporations are less efficient, competent, profitable and therefore competitive than their private sector counterparts.

Critics of privatisation say it encourages excessive salaries for executives, undervaluation of net worth, lower safety standards, tax evasion and avoidance, increased costs in search of profits, leveraged buy-outs, pay reductions for the workforce, loss of public accountability, and so on.

In the UK there has been crisis after crisis in the privatised water industry, a bitter dispute over the financing of London Underground, and spectacular failures of privately-led public projects in air traffic control and passports – but we still hear the mantra “private sector good, public sector bad.”

The reality is that the choice lies somewhere in the middle, and calls for a more flexible approach in policy making and the governance of corporations. We should note that the reasons for success are often harder to read than the causes of a failure. An examination of 12 privatised companies during the 1980s, for example, concluded that the fastest growing and more profitable firms benefited from growth and profitability in their sector, rather than private ownership itself, and productivity growth was unrelated to privatisation.

In the European telecommunications industry, there is little evidence privatisation had a favourable or reliable impact on economic performance. In the privatised water and sewerage companies in England and Wales, where there have been big reductions in labour usage, there has been no growth in total productivity.

Academic studies on privatisation refer to “the myth of efficiency.” The emerging view is that privatisation is not simply about private-public split theory. Rather it is a complicated process where many factors such as policy making, ideological commitments, business circumstances and social expectations, are combined.

Research continues to stress the need for a balanced approach to governance – one that takes advantage of both sides’ strengths and overcomes both sides’ weaknesses. Based on a mutual re-appreciation of roles, we have seen the emergence of public-private partnerships.

In proposing a joint venture of this type, it might seem that the owners of Lyttelton Port are trying to find such a “new way” between the extremes of nationalisation and privatisation. However these arrangements are risky, and indeed there have been some significant failures. When the partnership fails, it often transpires that one partner did significantly more due diligence work than the other. Organisations that govern publicly-owned assets need to know exactly who they are committing themselves to, how their partner operates and who they collaborate with. Even with the best of intentions, this is often difficult to get right.

The Lyttelton Port proposal is likely to be the first of many involving publicly-owned infrastructure. In some cases the drivers may be strategic, such as the need for a strong marketing alliance, but in many cases it will be the need for fresh capital which precipitates a deal. Experience internationally shows that there are alternatives. Australia, for example, issues Government savings bonds to fund major projects internally. This is considered an old fashioned idea by some, but it is an effective mechanism for raising investment capital without the risks of foreign control or reduced ownership. New Zealand could well benefit from a similar approach, but at the very least it should resist swallowing wholesale the notion that privatisation, or part privatisation, is the essential element of efficient and appropriate development.

Clive Smallman is Professor of Business Management at Lincoln University, Canterbury, New Zealand. His recent work includes a Research Fellowship at Cambridge University, UK, and a study of the impact of privatisation on public utilities.