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Friday, 11 November 2011

Public Property,People and Interest Rates

Deluded politicians, from BF [before Thatcher] to Cameron, have readily been persuaded that sales of public assets are a means of reducing 'the deficit' on the state budget. Superficially and in the short term this works, in the right circumstances. When the government is keeping state spending in check so that the current budget is close to balancing income with spending, the money recieved from selling railways or gasworks can be used to purchase state bonds which can then be neutralised. But when the government is spendthrift - as in the latter half of Gordon Brown's period of control of the state finances - any sale of public assets trivially reduces the rate at which the public debt is recorded to be increasing. Even in the early days of Brown's tenure his notorious sale of gold held by the Bank of England, at the bottom of the market, meant that the UK did not benefit from appreciation in the market price of that gold that accompanied his subsequent profligate state spending - and the consequentil fall in the value of the pound, as against gold - and this meant that the state's aggregate assets relatively were diminished by the sale.

The sale of electrical power distribution, waterworks and railways creates a long-term dilemma for governments. They may in the first instance be sold to a mass of small investors, but quickly most of them sell out to companies. Alternatively, in Russia and some other ex-communist states, the small stakeholders didn't understand what was happening and sold the vouchers that the government gave to them to 'oligarchs'. Russian billionairs have been more likely to keep their ownership of businesses than were indigenous British companies, whose shareholders have been free to sell the assets to international companies. In the British case, it then falls to the government - or to an 'arm's-length regulator' establishd and appointed by the government - to establish the price range in which electricity, water or rail travel are sold to consumers. The price must be high enough to keep the foreign investors sweet; and this is ensured by a process in which the regulator agrees with the company what its costs are likely to be for the next few years, then adds an allowance for inflation, then adds an allowance for the 'cost of capital' - the guaranteed minimum rate of profit to go direct to the owners. If the operators can make the company more efficient, they can take the extra profit; and if they can squeeze costs in the event of inflation to raise input prices by less than the inflation allowance they can add that profit to their take as well. So Canadian and Australian pension funds do well as owners of shares in British utilities: while British consumers are compelled to pay whatever prices are set by the regulator. Then the profit is exported, increasing the deficit on the balance of payments. So a short-term 'gain' for the government in the year of privatisation is followed by gains for the small shareholders who sell their shares [and the brokers who manages the sales] and then by gains from the shareholders in indigenous companies who sell to foreign investors [and the brokers who manage the sales, and the brokers who put together groups of pension funds when they buy the shares].

Just now the media are gloating that Greece and Italy are to be required to do the same. The unabashed Economists still tell the politicians that privatisation will create 'open markets' ['rational' markets]. But in the event, along with reduced pensions and frozen salaries, Greeks and Italians can expect to be taxed with higher prices for utilities that will be at the mercy of 'international investors' for the indefinite future.

Those 'international investors' mostly have good credit ratings, so they can borrow money at very favourable rates [especially while official interest rates are virtually zero]: while the customers of the services have to pay much higher prices, based on the 'cost of capital' set by the regulators on a quite different basis of reckoning, related to the 'average' cost of borrowing for a range of firms in the domestic market where small and medium-sized companies can only borrow at a high multiple of the rate that is available to AAA-rated global investors.

Well done the Economists and the gullible politicians: and well done the bankers and brokers who will manage the privatisations and the resales of privatised-industry shares! The policy of privatisation is part of the privation that the Greeks and Italians, Irish and Portugese [and maybe Spaniards and even French] will suffer. Yes, admittedly the private citizens, and especially the pensioners, cheerfully consumed beyond their collective means; as was arranged for them by their governments during the fake-boom years. Those politicians [and the former central bankers who now lead 'governments of national unity'] are likely to have invested their personal 'pension pots' in precisely the sort of international businesses to which the citizenry will be paying tribute for the rest of their lives.

I have no empathy at all with the reckless vacuity of the anti-Wall Street protestors, such as those who are shaming the environs of Saint Paull's Cathedral at present; but I fully share the public anger at the sort of depradations on the people that have been perpetrated by bankers and brokers - at the behest of politicians who are intellectually in thrall to the Economists. Let us be sure where the responsibility should be distributed!

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