Wednesday, 15 June 2011

Why selling infrastructure is stupid.

Public infrastructure includes a range of assets and services that enable an economy to function.  Many take the form of networks where completeness of the network is essential to its functionality.  Networks allow the core of the economy to interact with the periphery.  
  •         Networks are required to always have spare capacity
  •        Networks create opportunity not value

 Infrastructures do not, at their optimum service level, usually operate profitably, they create opportunity for profit making activity.  It is impossible to run an infrastructure to maximise returns to the owner while also maximising economic value to the economy. 

Infrastructure is typically owned by a governance entity on behalf of the collective of those who benefit from it.  This agency takes a number of forms but most typically is the state, local government, or an owner’s cooperative.   This has been the case for as long as history because infrastructure is both a natural monopoly and also because the economic optimum level of service is well beyond the profitable level of service.

Infrastructure also has a large beneficiary class who benefit as much from its existence as its use (think roads).  This is a problem for the owner as there is no direct means of capturing the value of the indirect benefit other than by taxation (or property rates).

This is why the mixed ownership model is unsound.  Furthermore it is not possible to have two owners, the state and the investor, with conflicting expectations of value.

New Zealand is full of lost opportunities to maximise the economy because privatised infrastructure over-charges and under-provides.  This means that both use and utility of the infrastructure are constrained and the entire economy constrained accordingly.

Public ownership of infrastructure was never a problem and management of publicly owned infrastructure was never the problem.

What we had and still have, is a governance problem.  

Those who decide on the investment strategies and management policies were the problem.  The fact that Parliament is still contemplating partial privatisation of infrastructure shows that Parliament still does not understand its governance role.

The privatisation of public infrastructure has become a popular concept.  After several thousand years where the logic of public ownership prevailed, it has suddenly become a good idea to sell essential public services to profit making entities.  Private business love this as it gives them an asset that it can either strip of capital then dump or can be run at a guaranteed profit as a natural monopoly.  Often the new owners attempt both (as with NZ rail and to some extent Telecom) only to be eventually thwarted by deterioration of the function of the asset at which point the State has to restore it to public ownership (NZRail) or regulate the activity at a cost to the inflated capital value of the business or otherwise regulate and subsidise the restoration of its function (Telecom).

Private owners usually hit these assets savagely when they first take control, stripping out much of the bureaucracy that contains the organisation’s intellectual property.  Service reductions are presented as efficiencies when they are typically cost transfers from the cost of operation out to the wider economy. 

When communities or states sell their infrastructure they seem to view the proceeds as a windfall.  The beneficiaries of these “windfalls” do not seem to understand that nothing is free.  

The taxpayer and the infrastructure user are one and the same person.

The “windfall” must be paid for and the only ones who benefit from the services of the asset they have just sold is themselves.  That they have sold an essential service, something they cannot do without - to some one who has no regard for anything other than profit does not seem to register in their awareness – until the first bill comes in.  

Our leaders have in effect sold the right to be taxed forever in return for a once only payment.  This is a Mephistophelian deal.  In all cases it would be cheaper and much less foolish for the community owning the infrastructure that they wish to sell to go and obtain a loan against the asset and spend the money.  They will have to pay the money back but at least they will still both own their infrastructure and have control of the cost of debt.

This thinking seems to have reached its ludicrous extreme when it results in the Victorian State government selling parts of its electricity reticulation network to a Singaporean based retirement fund. 

Every time someone throws a switch in Victoria they make another small payment towards someone’s retirement in Singapore.  It needs to be asked why is it that an agency of a foreign government can do a better job of owning and managing a strategic asset essential to the economic future of Australia than the Australian Government? 

This is a statement about the relative competence and strategic vision of the politicians forming the Australian Government and the Singaporean Government rather than the relative merits of state versus private ownership.

We have the same problem.

At least the Aussies stood up to their government when it came to selling the Snowy River Scheme!


  1. "The fact that Parliament is still contemplating partial privatisation of infrastructure shows that Parliament still does not understand its governance role."

    Nice. I'm going to enjoy reading this blog.
    And spreading the word that there's a thinker here, thinking!

  2. too busy divvying up the spoils!!

  3. Your new front page image is excellent!

  4. I agree, very good. Succinct and sound analysis.

  5. DarkHorse,
    I totally agree that government's role is one of governance, not of ownership of New Zealand's future income generators and especially not of its parks and its libraries and its council flats for the aged and its water supply.

    If New Zealanders this government back in they are in fact giving Key the mandate (as he has said) to become the owner of our assets without any legislation taking place.


  6. If New Zealanders vote/mandate this government back in we have lost ownership of our future and control over their behaviour and that of any future government or foreign owner of our country - we forget that governments can be owned by foreigners or business cartel cuckoos in our own nest.

