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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Privatisation Reduces Crown’s Conflicts of Interest – Crown Fibre Illustration

An article in a weekend newspaper asserted that the best argument for privatisation was that it would deepen New Zealand’s capital markets.

Regardless of whether it is the best political argument, it is not the best public interest argument.

The fundamental problem with government ownership of commercial operations is that politicians have neither the skills nor the incentive to run commercial operations successfully.  There can be exceptions, for a period of time, but they are exceptions rather than the norm.

One aspect of the incentive problem arises from the conflict between political ownership and regulatory interests.  A government might be tempted to regulate in favour of its own operation either for revenue purposes or to make its performance look more respectable.

The conflict of interest issue was raised in Monday’s DomPost which carried an article on the apparent inability of Crown Fibre, the state company set up to oversee the government’s $1.5 billion of spending on the $3.5 billion fibre network, to work satisfactorily with the country’s top telecommunication companies.  The article identified the Crown’s conflict of interest problem as a constraint on its options for rectifying matters.

If this were the case, it would not be dissimilar to the problems that have prevailed with many SOEs over the years.