It’s a tangential point, but—going back to the Thatcher years—the argument that made me want to scream was the claim that a substantial rise in the share price immediately post-privatisation somehow signalled the success of the venture. As opposed to: we underpriced the asset and just made a substantial transfer to investors from the citizenry as a whole.
I believe the CSL IPO list price was $2.50? Immediately rocketing up because it was sold far too cheaply. And now when I donate blood for my fellow citizens, I know that some of it is likely to be sold overseas for private profit.
George Monbiot's ongoing commentary on the state of the UK water industry is eye opening. It is appalling how raw sewage is just pumped into British rivers these days, without much hint of dissent. Civil society has been cowed or numbed in recent decades, this sort of behaviour would have been beyond the pale once. Have corporations have become more evil, less responsive to norms of good behaviour? Governments have also used privatisations to lengthen the chain of responsibility - they can say that it's not their fault, and whatever happened had to happen, market forces don't you know. Of course in the UK they simultaneously gut the environmental regulators, reducing the flow of information, meaning that it takes committed, concerted action by civil society participants to fix anything.
Also ... returns on equity are sustained by borrowing, which in turn is the source of much of the risk. Some people seem to forget that the point of Modigliani–Miller isn't "leverage makes no risk", but rather "at least one of our assumptions must be wrong."
I just opened today's Matt Levine to read the following:
The Financial Times has a fun graphic feature titled “How private equity tangled banks in a web of debt,” the essential point of which is that everything in finance is more fun with a bit of leverage:
1. If there’s a company, a private equity fund can buy it, putting up some of its own money (the equity) and borrowing the rest, secured by the assets of the company.
2. The private credit fund that made the loan in Step 1 can put up some of its own money and borrow the rest from a bank to fund that loan.
3. The private equity fund buying the company in Step 1 can temporarily borrow the money it uses to write the equity check (a “subscription line”), secured by the commitments of its investors (its limited partners) to eventually put up the money.
4. After buying the company, the private equity fund can take out a margin loan, secured by its equity stake in the company.
5. Or it can take out a net asset value loan, secured by its equity stakes in a whole portfolio of companies it owns.
6. Also the company can borrow more money to pay dividends to the private equity fund.
7. The limited partners can sell their stakes in the private equity fund to a secondaries fund, which can borrow some of the money to buy them.
8. The general partners (sponsors) of the private equity fund can borrow money, “secured by management fees and carried interest income.”
9. Or other funds can borrow money to buy the general partners’ stakes in their firms.
In Edinburgh, I heard how people there were quite enamoured with their publicly owned buses. Apparently the national government required the buses to be privatised, so the local councils combined their efforts and bought out the listed shares. Could that be a model for returning privately owned public transport services and roads to public ownership in Australia - without it being an extortionate cost?
I can think of only two arguments for privatization, and they're generally invalid.
First, there is the situation where government credit is inferior to market credit. This argument is almost inconceivable for sovereigns. Sovereigns with poor credit are almost invariably sovereigns that cannot make credible commitments. The argument can sometimes work for local governments, but they still have the option of issuing revenue bonds as a form of asset-based financing. So it's not a very good argument.
The second argument is union busting, which is politically easier in a private framework. Union busting is generally a wretched policy. The unions one might want most to bust belong to the hardest function to privatize: police.
Twue! But suborning governments is a core competence of Big Oil and (in the US, at least) Big Cable. I'm not sure which is worse: subornation from within the public sector, or subornation of the public sector by the private sector. I tend to think the latter, but ymmv.
"they assumed public investments should be subject to a large risk premium to make them comparable to private alternatives"
Seriously? Isn't that begging the question? It seems equivalent to an axiom that public investment can never be a better choice than privatization. How would that theory be applied to say, inflation-linked bonds, where the price of risk sometimes has a sign change. The usual explanation is that the government is a natural inflation seller (because it raises taxes in nominal dollars) and various private agents such as pensions are natural inflation buyers, and so according to the balance between them one side or the other may have to pay the price of risk.
Nothing would compare with the privatization of superannuation? At the heart of the case for compulsory superannuation is the belief that somehow the cost of supporting retirement can best be met by funding financial assets, by diverting funds from investing in GDP related assets. As such a diversion takes place, the growth of our real economy declines as financial assets inflate and our capacity to meet the real cost of retirement shrinks.It is not just a matter of meeting the high cost of managing superannuation accounts, but of accounting for the misallocation of resources, of the growing risks of financial disorder, let alone the decline of democracy as unearned financial wealth concentrates.
Super has a complex place in Australian political thinking, quite different from the general debate about privatisation. There’s a long-standing, never properly articulated, hope that super funds will provide the money for big infrastructure investments in a way that avoids both privatisation and the need for public debt. The role of industry super funds with union representation complicates things even more.
It’s a tangential point, but—going back to the Thatcher years—the argument that made me want to scream was the claim that a substantial rise in the share price immediately post-privatisation somehow signalled the success of the venture. As opposed to: we underpriced the asset and just made a substantial transfer to investors from the citizenry as a whole.
I believe the CSL IPO list price was $2.50? Immediately rocketing up because it was sold far too cheaply. And now when I donate blood for my fellow citizens, I know that some of it is likely to be sold overseas for private profit.
I wrote about this at the time with Clive Hamilton and more recently in the early days oif the pandemic https://independentaustralia.net/business/business-display/paying-for-what-we-used-to-own-the-strange-case-of-csl,14558
George Monbiot's ongoing commentary on the state of the UK water industry is eye opening. It is appalling how raw sewage is just pumped into British rivers these days, without much hint of dissent. Civil society has been cowed or numbed in recent decades, this sort of behaviour would have been beyond the pale once. Have corporations have become more evil, less responsive to norms of good behaviour? Governments have also used privatisations to lengthen the chain of responsibility - they can say that it's not their fault, and whatever happened had to happen, market forces don't you know. Of course in the UK they simultaneously gut the environmental regulators, reducing the flow of information, meaning that it takes committed, concerted action by civil society participants to fix anything.
Also ... returns on equity are sustained by borrowing, which in turn is the source of much of the risk. Some people seem to forget that the point of Modigliani–Miller isn't "leverage makes no risk", but rather "at least one of our assumptions must be wrong."
I just opened today's Matt Levine to read the following:
The Financial Times has a fun graphic feature titled “How private equity tangled banks in a web of debt,” the essential point of which is that everything in finance is more fun with a bit of leverage:
1. If there’s a company, a private equity fund can buy it, putting up some of its own money (the equity) and borrowing the rest, secured by the assets of the company.
2. The private credit fund that made the loan in Step 1 can put up some of its own money and borrow the rest from a bank to fund that loan.
3. The private equity fund buying the company in Step 1 can temporarily borrow the money it uses to write the equity check (a “subscription line”), secured by the commitments of its investors (its limited partners) to eventually put up the money.
4. After buying the company, the private equity fund can take out a margin loan, secured by its equity stake in the company.
5. Or it can take out a net asset value loan, secured by its equity stakes in a whole portfolio of companies it owns.
6. Also the company can borrow more money to pay dividends to the private equity fund.
7. The limited partners can sell their stakes in the private equity fund to a secondaries fund, which can borrow some of the money to buy them.
8. The general partners (sponsors) of the private equity fund can borrow money, “secured by management fees and carried interest income.”
9. Or other funds can borrow money to buy the general partners’ stakes in their firms.
10. I am sure I am missing some?
* I meant "no difference" rather than "no risk"
Thanks for the article, John.
In Edinburgh, I heard how people there were quite enamoured with their publicly owned buses. Apparently the national government required the buses to be privatised, so the local councils combined their efforts and bought out the listed shares. Could that be a model for returning privately owned public transport services and roads to public ownership in Australia - without it being an extortionate cost?
I can think of only two arguments for privatization, and they're generally invalid.
First, there is the situation where government credit is inferior to market credit. This argument is almost inconceivable for sovereigns. Sovereigns with poor credit are almost invariably sovereigns that cannot make credible commitments. The argument can sometimes work for local governments, but they still have the option of issuing revenue bonds as a form of asset-based financing. So it's not a very good argument.
The second argument is union busting, which is politically easier in a private framework. Union busting is generally a wretched policy. The unions one might want most to bust belong to the hardest function to privatize: police.
True, but in some LDC the public enterprise just because the fief of a circle of employees and suppliers. [I'm thinking of PEMEX and public telcoms.]
Twue! But suborning governments is a core competence of Big Oil and (in the US, at least) Big Cable. I'm not sure which is worse: subornation from within the public sector, or subornation of the public sector by the private sector. I tend to think the latter, but ymmv.
"they assumed public investments should be subject to a large risk premium to make them comparable to private alternatives"
Seriously? Isn't that begging the question? It seems equivalent to an axiom that public investment can never be a better choice than privatization. How would that theory be applied to say, inflation-linked bonds, where the price of risk sometimes has a sign change. The usual explanation is that the government is a natural inflation seller (because it raises taxes in nominal dollars) and various private agents such as pensions are natural inflation buyers, and so according to the balance between them one side or the other may have to pay the price of risk.
BlackRock's keen on big battery investment in Oz but maybe not much else. If BR doesn't want to do much here, I bet it's not because we're unwilling.
Not in little old NZ. Our re-run government is determined to learn these lessons twice.
They have turned out to be real extremists, in a way that wasn't obvious (from this side of the Tasman, at least) before the election.
It wasn't obvious to us this side of the Tasman either.
Such a superb summary on the topic! Thank you John.
Nothing would compare with the privatization of superannuation? At the heart of the case for compulsory superannuation is the belief that somehow the cost of supporting retirement can best be met by funding financial assets, by diverting funds from investing in GDP related assets. As such a diversion takes place, the growth of our real economy declines as financial assets inflate and our capacity to meet the real cost of retirement shrinks.It is not just a matter of meeting the high cost of managing superannuation accounts, but of accounting for the misallocation of resources, of the growing risks of financial disorder, let alone the decline of democracy as unearned financial wealth concentrates.
Super has a complex place in Australian political thinking, quite different from the general debate about privatisation. There’s a long-standing, never properly articulated, hope that super funds will provide the money for big infrastructure investments in a way that avoids both privatisation and the need for public debt. The role of industry super funds with union representation complicates things even more.
Is not age pensions a public good and compulsory superannuation, privatization?
As I said, that's a perfectly legitimate framing, but not the way most people in Australia think about the issue