Economics of Nationalisation: Misdirected allocation of national resources

I read with interest a number of comments being made in the newspapers regarding plans to nationalise the PLUS toll road. On a purely economic argument, such plans will do more harm than good.

Advocates for nationalisation usually will argue using the following theme:

1.       Weaknesses of the free market / private sector

a.       Free market price mechanism too volatile/uncertain;

b.      Efficiency gains in a private enterprise can come at expense of customer;

2.       Public ownership to meet economic & social targets

a.       Not for profit businesses – social aims / public interest;

b.      Natural monopoly arguments - in the interests of consumers;

c.       Quality of service: For example if medical service is private, rural households would lose out due to cost and location.

3.       Employment protection

a.       e.g. bank collapses – responding to the problems of systemic risk;

4.       Strategic justifications

a.       e.g. nuclear power, airlines

5.       Public sector can be a vehicle for macro-control

a.       Pay restraint

b.      Employment at different stages of the economic cycle

However, it is also worth mentioning that the world has become a global village with modern infrastructure in place/to be put in place. Markets are getting very efficient and there are ways and means to deliver the necessary services and products based on spending capacity. Due to the phenomenal changes in the market place, the following is the counter-argument.

a.       Cost to government/tax payer (opportunity cost)

b.      Inefficiencies arising from government ownership - inefficiency, weak productivity growth

c.       Overinvestment + Diseconomies of scale (overstaffing)

d.      Government has poor track record with efficient project management or budget control

e.      Public sector has poor record on industrial relations -often at direct cost to the consumer and to small businesses.

f.        Moral hazard if state owned industries cannot go bust in the usual way

g.       Poor record on customer service in some public enterprises

h.      Rate of Return regulation / Price Cap regulation could be used instead of full-blown nationalisation

i.         Promotes unfair playing fields

j.        Grey area on legislation on competition

k.       Political priorities can over-ride commercial issues on capital projects (regulatory capture?)

To argue convincingly, we need to apply some key concepts to the issue. For example:

• ·         Economic efficiency
• ·         Funding versus delivery of key public services
• ·         Public private partnerships
• ·         The role of regulatory agencies acting as surrogate competitor
• ·         State aid

My next posting will be on the argument why market would be the better judge of business instead of the Government.