Ports of Auckland Case Illustrates the Problem of Government Ownership

Shippers and freight handlers would like lower port charges, port employees would like better wages and conditions, and investors in the Port of Auckland would like a higher return.

Much the same could be written about any firm in any industry, yet as written it looks like a ‘zero-sum’ battle between opposing interests; as if one party’s gain must be at another party’s cost.

Why then is all the current media attention on the Ports of Auckland situation?  Why are most firms in all industries not in similar strife?

One answer is that in normal competitive situations the common interest of these parties is far greater than the opposing interest.  Customers prefer a competitive service to no service, workers prefer productive work to no work, and firms can’t reward investors without productive workers and satisfied customers.  Provide a competitive environment and a co-operative solution is the norm in which each group can expect to be better off than if the job, investment, and customer service opportunity does not exist.  Firms that can’t make the grade are replaced by ones that can.

The cooperative norm can break down when some form of intrusive government regulation politicises or polarises one or more of the relationships, usually by artificially restricting one group’s ability to exit, or another group’s ability to enter.

Government ownership of a commercial operation is at the extreme end of the range of intrusive government regulations. It typically disenfranchises investors, being the potentially hapless ratepayer or taxpayer. The Auckland Council’s ownership of Ports of Auckland Limited forces Auckland’s ratepayers to be captive investors, as long as they reside in the Auckland rating region.

Ratepayers are at risk that port charges will be too low and/or port costs too high because the Auckland Council is not focused on controlling costs and demanding an expected return that covers the opportunity cost of the capital to the ratepayers who are effectively supplying it.

Part of the problem is lack of knowledge.  The Auckland Council probably does not know how many of its ratepayers are borrowing more heavily on mortgages, credit cards, or worse, because the Council has invested so much of their money unnecessarily.  It will almost certainly not know what risk premium it should add to such interest rates to reflect the equity risk of its investments, as perceived by the same ratepayers.  Nor can councillors be expected to know much about port costs.

The port’s customers and employees may fear the opposite risk – that the Council will use the port as a cash cow to fund other Council activities at their expense.  This would normally be a lesser risk because customers and employees can vote with their feet.  But this process can take time.

Another risk for ratepayers, and for the community overall, is that the Council may spend unwisely whatever return it gets from its commercial investments.  After all, councillors are not usually elected for their commercial expertise, fiscal prudence, and lack of obligation to partisan interests.

Privatisation would eliminate the problem of involuntary captive ratepayer investors.  Returning the net proceeds to ratepayers would allow those with a mind to do so to reduce their debt burdens.  Those who chose to remain invested would have much greater control over the risk-return trade-off.

But privatisation is no panacea.  It does not solve the problem of intrusive government labour market regulation that disempowers individual workers, some of whom might now lose their jobs through no fault of their own.

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Friday Graph: NZ’s Relatively Inflexible Hiring and Firing Practices

The ‘creative destruction’ of competitive processes requires labour and other resources to be continually shifted from contracting areas of the economy to expanding areas.  Rigid labour markets impede this process, with government regulations being a common cause of inflexibility.

A March 2012 IMF Working paper here uses statistics on 97 countries between 1980 and 2008 to assess the importance of labour market flexibility.  It finds that financial crises initially have a large negative impact on unemployment, but this effect rapidly disappears in the medium term in countries with flexible labour markets.  There is less pronounced, but more persistent, unemployment in countries with more rigid labour market institutions.  No surprises there.

A second March 2012 IMF Working Paper here by the same authors, also using a panel of 97 countries but this time spanning the period from 1985 to 2008, suggests that improvements in labour market flexibility, particularly in respect of hiring and firing regulations and hiring costs, reduce unemployment, youth unemployment and long-term unemployment.

Given the importance of ease of hiring and firing for flexibility, it is regrettable that New Zealand ranks so poorly in the world (86th) in respect of such practices – according to the latest World Economic Forum’s Global Competitiveness Index 2011-2012 (see the graph below).

click above to view larger

More happily, New Zealand ranks much better for other aspects of labour market flexibility in this index, being 10th in the world overall.

Note that the ranking for hiring and firing is based on surveyed opinion rather than ‘hard’ data.

Readers can create their own charts here using this database.