Monday, September 7, 2009

When privatisation offers the best value

Nicole Alpert. Observer: When Privatisation Offers the Best Value. Sep 05, 2009. A11, SCMP.

When tax revenues decline, privatisation provides better opportunities for improving growth and lessening the government's burden than raising fees and tax rates, as many jurisdictions are doing. Governments privatise with the aim to generate revenue and cut costs by eliminating unnecessary spending, all the while keeping the social costs low.

Microeconomic theory explains the incentive problems that cause inefficiency in public ownership versus that in private firms. That is why, in unfettered markets, private firms - not government enterprises - get a reputation for spurring growth.

The Hong Kong Housing Authority's divesture and privatisation of its shopping centres and car parks in 2004-05 is one example where incentive problems and wasteful spending in publicly owned facilities have been removed by privatisation.

With subsidised rents and mismanagement, the authority-owned centres and car parks lost prospective revenue and multiplied inefficiency. Under Housing Authority management, about 30 per cent of car park spaces (some 30,000) were left empty, as those spaces would only be leased to residents from a particular estate, not to outsiders from which there was a demand.

The Director of Audit's 2008 report stated that some government rents were subsidised at levels of only 1 per cent to 5 per cent of the market rate. This left room for sub- lessees to pocket the difference. These systems, wrought with inefficiency, are not capable of surviving at a private level. This is not the type of government system of which Hong Kong wants to boast, which is why the authority changed direction.

When The Link Management took control, the 30 per cent of car park spaces previously off limits were opened to the public and the rent was adjusted to market rates. Privatisation increased profitability and efficiency - the public is now better off, but the previous tenants might not be. Because of the move away from subsidised rent, numerous tenants and their legislators are protesting. Recently, lawmakers have called for parties across the board to force The Link to give special treatment to small tenants.

Rental subsidies helped some tenants, but to the detriment of taxpayers. Some worry that small shops will become a thing of the past and larger stores will drive up prices, but consumers' actions prove otherwise. It is consumers, making choices out of self-interest, not tenant associations or legislators, that dictate which shops survive.

To support their constituency's tenants, legislators are calling for government control or a takeover of The Link, but this is not constructive. The calls are merely political manoeuvring, but they are dangerous because they propose infringing upon property rights and squandering public money. Exerting political pressure, threatening force or suggesting a buy-back of The Link harm Hong Kong's reputation and rip the seams of its respect for property rights and rule of law. Legislators must be careful - "wasting public money" is not a motto any politician wants to inherit.

The privatisation of the Housing Authority's facilities has provided profit to the government and reduced inefficiency with low social costs. The authority has benefited from the sale of the divested Link Reit, with the revenue giving it an improved position to manage its deficit. The Link is symbolic in that, if the government can refrain from intervention, we can anticipate better services in perhaps the Airport Authority, the Post Office or the Mortgage Corporation.

Other jurisdictions with low tax revenues should consider what privatisation could do for them instead of ratcheting up taxes and fees. Privatisation gives taxpayers a break, earns revenue and fills the gaping hole from low tax revenues. It is hard to think of any other policy that produces such profits for the government and benefits for the public.

Nicole Alpert is a research associate at The Lion Rock Institute.

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