Being that Canadaian politics is one of my current obsessions, my podcast subscriptions are recently littered with the issue of public asset sales being an agenda item of both the federal and many provincial governments. This issue resonates with me to some degree because I’ve been intensively following the US banking crisis.
I see parallels here for one very specific reason: The decision to extend public institutional support to major banks in the US was essentially a nationalization of one of the primary jobs of those banks: their management of risk. They no longer have that task, regardless of what actually happens with their ownership structure going forward. The government has implied through its action that mismanagement of risk is something that will be back-stopped by taxpayers. But that guarantee comes with no preconditions on the ability of the private managers to withdraw equity and profit from their remaining successful market activities.
The primary criticism of the US government’s reaction to the banking crisis is that it extended moral hazard by providing this backstop without any regulatory reform — in other words that no banks were forced to become significantly governed by their new federal guarantors. This conundrum is something I see significantly affecting the idea of public asset divestiture as well.
Public assets, regardless of their function, are what they are for a reason. Either they are or were regarded as a strategic institution that should not be controlled by the private sector for security or regulatory reasons, or they were a failed private market institution that needed back-stopping by the public sector to remain available for civic use despite an inability of their managers to provide the service successfully (in terms of corporate profit and equity demands) in the market.
Whilst management incompetence can occasionally explain the reason for the latter, a far more common reason for nationalization or public acquisition of a private concern is that the service in question is incapable of providing the type of equity withdrawal or return-on-investment expected of many private sector indeavors. In some nations this is resolved by regulation. In others it’s resolved by nationalization — eliminate the profit/equity constraints on a business in order to retain a necessary civic service.
And thus any discussion of privatization or divestiture should be prefaced by a serious public debate which addresses these points: what was the reason this asset was a public asset in the first place? If it was security, why is the environment different now? If it was market failure, does the government thus intend to never again enter into this same sector?
For the latter, the parallels with the US banking crisis are monstrous. US banks are forever going to expect that mismanagement will not be fatal to their existence because the government has allowed them to continue to function in the market as private and profit-driven entities despite what would otherwise be mortal failures. If a now-viable and profitable bridge or railway is divested from the government (during a deflationary recession, no less — but that’s another issue), and a private concern begins typical corporate equity withdrawal, what is to prevent that concern from requiring renationalization years or decades down the road, when the private market decides it is no longer sufficiently profitable to provide the basic service that public ownership once guaranteed (assuming the service is still seen as a public necessity)?
Thus, divestiture should only occur if it’s a service the public no longer “expects”, or that is seen as strategically unnecessary within the polity. In a time of increasing energy costs and decreasing household wealth, privatizing public transportation and energy transmission systems seems like the heat of folly to me — especially at a time when economic stresses have driven down asset prices across the board (sell low!).