Indexing New Zealand Superannuation (30 September)
A New "Coalition" Agreement? (25 September)
Fining Community Wage Recipients (23 September)
Helen Clark and the Grand Coalition Option (19 September)
Helping the Government to Lurch to the Centre (11 September)
Why are we too Scared to Change our Flag? (6 September)
Demonstrating in support of ENZA's Monopoly (5 September)
Anti-Defector Legislation (3 September)
Mike Moore's Simplistic Views on Trade and Protection (3 September)
Funding Public Infrastructure (2 September)
Indexing New Zealand Superannuation
(30 September)The proposal announced yesterday by Prime Minister Mrs Shipley to allow guaranteed retirement incomes to drift down to 60% of the average wage rather than be supported at 65% of the average wage is just another in a long line of small changes to the scheme that was introduced in 1976. Back then, National Superannuation was indexed at 80% of the average wage and was payable at age 60.
One irony is that the removal of the superannuitants' tax surcharge in April this year gave significant gains to the richest 15% of retired persons. Therefore, taken together, policy changes on pensions this year amount to a transfer from the poorest to the richest of our retired population.
The present public pension scheme is more generous to retired persons with high private incomes than it was in 1976. Although the amount of pre-tax superannuation is lower in inflation-adjusted terms, it is taxed at 33% whereas in 1976 it was taxed at 60%. And the marginal rate of tax on private income for such people was 60% then (raised to 66% in 1982) whereas it's now 33%.
So much for the rhetoric of targeting. The rich have more now, while the poor continue to face erosion of the relative value of their pension.
The New Zealand Superannuation scheme (as it is now called) has much in common with a Universal Basic Income (UBI) for people aged over 65. But there is one important difference. NZ Super fails to integrate with the income tax system. Thus people getting NZ Super also get the ordinary tax benefits that arise from the graduated income tax scale. NZ Superannuation is, in effect, targeted to the rich.
In practice it is possible to make huge savings on the cost of NZ Super by adopting UBI principles; ie by not paying higher benefits to the rich. By doing that, the pension payable to retired persons without private income can be raised, as is shown in "New Zealand Superannuation: a form of Universal Basic Income?" Married superannuitants should not be penalised as they are today.
It is important to note the long term effect of indexing pensions to the Consumers Price Index (CPI). Three years ago I published an article in The Independent ("Shortchanging the Beneficiary with a New Measure of Inflation") which contains a table which shows that the original pension (introduced by Prime Minister Richard Seddon in 1898) would have been $2,156 per annum in 1995 had a CPI-based indexing formula been used throughout. (The actual amount in 1995 was $9,492 per annum.)
In fairness to the present Shipley government, they haven't fully abandoned indexing pensions to wages. There is still a floor at 60% of the average wage. But then, who's to say that that floor will be honoured, given the past record of broken promises on pensions?
One more thing. Even wage indexing is not much use these days, following the 1991 Employment Contracts Act. The theory of wage indexing is that wage rates rise in proportion to GDP per capita. The empirical evidence suggests otherwise. With higher unemployment and a much less regulated labour market, the median wage is barely keeping up with inflation, let alone with GDP.
The median real income of males today is the same in the 1996 census as it was 40 years earlier. In that time, GDP per capita increased by 80%. The median male is not in poverty today because his income was relatively high in 1956. However, if the median income of retired New Zealander's in 40 years time proves to be no higher than in 1998, then the elderly population really will have been consigned to poverty, just as they would be in poverty today if they were dependent on pensions of $2,156 per year.
A New "Coalition" Agreement? (25 September)
A report in today's Herald says that "Parliament's Independent MPs have signed up to a set of key 'principles'.... [with] a strong National Party flavour to them.... Mr Birch [the Treasurer] said the eight Independents formerly with New Zealand First had agreed to them without any difficulty."
They are:
Decoded, they translate to:
Maybe Ann Batten and the tight three (Tau Henare, Tuku Morgan, Rana Waitai) have chosen to be slow learners when it comes to reading political code? Maybe they have they sold out for the sweetener that is point 5?
Maybe the first four points are window dressing to disarm New Zealand's right wing constituency? There can be little doubt that our neoliberals can read the code. The political reality is that the right-wing Act Party, whose votes the government requires, is the biggest threat to the survival of the National Government.
This government has 12 months at most to implement its policy principles. I doubt that they will introduce any new initiatives with respect to the first four points. Only yesterday, Mr Birch was reported on television as saying that the Government will not aggravate the recession we are in by initiating a new round of expenditure cuts. While it pays not to give too much credence to such political statements, Mr Birch has at least acknowledged that Governments do aggravate recessions when they cut social expenditure.
1999 is election year. While Mr Birch plans to retire in 1999, there is no obvious reason why he or Mrs Shipley [the Prime Minister] would direct the National Party to commit political suicide.
PS. It is now official that New Zealand is in a recession. Seasonally adjusted GDP was down 0.8% in the June quarter, following a 1.0% fall in the March quarter. The decline in New Zealand's GDP in the first half of the year represents an annualised rate of economic growth of -3.6% (-4.7% per capita). [See this graph.]
Fining Community Wage Recipients
(23 September)It was reported in today's Herald that Community Wage recipients stand to lose 8% of their benefit if ever they are 15 minutes late for work. This lends credence to the centre-left view that the Community Wage Scheme is, in essence, a punishment for being unemployed, and is not really a way of getting long-term beneficiaries constructively involved with their communities.
From next month, all unemployment and sickness beneficiaries will be on the "community wage", meaning that their benefit will have a new name. A small minority of those will be obliged to participate in the Community Wage Scheme, which should be seen as a contractual arrangement whereby the new government agency - the Work and Income Agency (WIA) - gets targeted beneficiaries involved with community projects, including projects sponsored by the WIA, in return for come level of commitment by the participants.
As such, the Community Wage Scheme could be, on balance, a positive improvement for today's long-term beneficiaries who are stigmatised and subjected to gross neglect.
The positive aspects of the scheme fall by the wayside, however, if the community wage is presented as a labour wage rather than as a benefit, and if benefits are presented as charity rather than as social wage entitlements.
From the correct social wage perspective, cutting a benefit is a fine: a loss of entitlement rather than a loss of privilege. Fines may be justified in certain social circumstances - eg speeding fines are justified because driving a car at high speed is both illegal and dangerous to others. Turning up late for voluntary work fits into a rather different category. (It should be noted that mothers receiving the Domestic Purposes Benefit are fined if they do not name the natural father of their children. That precedent of fining beneficiaries seems to be not dissimilar to the proposals to fine unemployment and sickness beneficiaries.)
Work done under the auspices of the Community Wage Scheme is voluntary work, in that it is not done under any labour code. The participants are not being paid wages. Commitment to community projects should be "enforced" through ways other than fines. After all we don't fine university students who fail to complete assignments, and it is not necessary to fine students to motivate them. Tertiary education, like participation community projects, is unpaid work.
The Community Wage Scheme will fail to achieve anything for anyone if its participants are stigmatised and impoverished. Making unpaid workers pay fines stigmatises and impoverishes.
There is a much better way; use the 'carrot' rather than the 'stick'. That means the government must commit itself to sponsoring a wide range of genuine community projects; projects that will make people proud to be a part of. Such a commitment to social inclusion is fiscally responsible; running a budget surplus during a recession is not.
PS (30 September): On the matter of fines for errant Community Wage recipients "Peter McCardle says the penalties will 'only be used in rare cases but are essential to have as backup'." (NZ Herald, "Dole day like none before", 30 September 1998).
An interesting analogy is that of the "unconditional love" that is rightly expected of parents towards their children. It may be appropriate for parents to augment unconditional love with "tough love" when caring for intransigent offspring. I am sure that that Mr McCardle sees his 'baby' in these terms of providing 'unconditional' and, where necessary, 'tough' love to the chronically unemployed. The sceptics believe, on the contrary, that love doesn't come into it; that the Community Wage is just punishment, plain and simple.
In the end, I believe it will be the culture that emerges in the Work and Income Agency that determines whether the Community Wage programme is supportive or punitive towards its 'clients'. The jury is still out. The danger is that by pre-labelling the scheme as essentially punitive, then that prophecy becomes self-fulfilling.
Helen Clark and the Grand Coalition Option
(19 September)On Wednesday (16 September), Jenny Shipley suggested that a "grand coalition" between National and Labour might be an important option for New Zealand government, at least in the future.
I'm disappointed with Helen Clark's response. In my view, she has helped to push the post-MMP governments to the right, and has played a large role in setting the adversarial tone that has characterised this Parliament. If Clark refuses to ever support moderates to her right, then those moderates have no option but to look to their right. Act can pull strings within the government if Labour rules out any form of cooperation with National. Good politics is always keeping one's options open.
On Thursday (17 September) on Kim Hill's show (National Radio), Clark presented the view that New Zealand politics have been and always will be bipolar - ie contested between social democrats and conservatives - and never the twain shall meet. She does not seem to understand the politics of proportional representation anything like as well as Jenny Shipley does.
Clark regards forming a coalition as being the same thing as propping up someone else. She does not seem to see that a grand coalition is not the same thing as a National government. She cites a number of National-cum-Act policies that she is opposed to as a reason for rejecting a grand coalition out of hand. In the Herald (17 September, p.A3) Clark "said any notion of Labour going into coalition with a National Party 'hell-bent on right-wing policies as utterly ridiculous. Labour has no intention of charging ahead with sales of strategic assets, fiddling with holidays and employment laws to the detriment of working New Zealanders, punishing beneficiaries [1] or privatising tertiary education'."
The irony is that, by forming a National-Labour Government, Labour would be able to veto those right-wing policies. Clark has chosen to avoid any opportunity to contribute to policy formation in the life of this parliament, thereby leaving it to the right to implement the policies that Clark feigns to wish to stop. If New Zealand's universities are ever privatised, it may be because of a refusal by Labour to participate in government.
It is true that Labour would not have much identity in a grand coalition if one was formed today. But that is entirely Labour's fault. Labour has adopted the old FPP ('first-past-the-post') tactic: "oppose, oppose, oppose". Hence they have few policies of their own to contribute to a grand coalition. On the Kim Hill radio programme, Clark could only mention restoring lump-sum entitlements to ACC (Accident Compensation) as something that a Labour Government would do.
I am convinced that a Clark-Cullen-Anderton government will run Parliament on the same adversarial lines as happened in 1997, while being tension-riven from within. I don't see much MMP culture on the centre-left.
Labour likes to be outraged. If it actually took steps to block the policies it opposes, then it would have less to be outraged about. Labour seems to be much more concerned with power than with principle. In Opposition, they would rather highlight National's sins than remedy them.
Despite the fact that most people in New Zealand identify with either left or right, the centre of gravity of New Zealand politics is in the centre, and almost always has been. New Zealanders are progressive, innovative, pragmatic. A Government weighted to the centre might suit New Zealand just fine.
Helping the Government to Lurch to the Centre
(11 September)Richard Prebble, the leader of the New Right party, Act, has been trying to manipulate the minority National Government into lurching to the right as a price for Act's support on matters of confidence. Prebble knows how desperate Jenny Shipley is to hang on until the APEC conference in September 1999.
As it stands, it seems as if Act can pull the plug on the Government, as and when it chooses. Labour's longstanding culture of opposition prevents Labour from ever considering supporting the Government on a matter of confidence. The same applies to the Winston Peters half of the New Zealand First party. Peters has renewed his enmity with the old foe.
The Alliance - generally to the left of Labour - can defuse the threats from Act, however. It can pull the minority National Government towards the centre and away from Act, by offering to support National on any matters of confidence that Act may be wavering on. Virtually by definition, such matters of confidence will involve legislation or economic policy to the left of centre-right.
The Alliance's price should be that the Government facilitates (as distinct from supports) private members legislation. Indeed the new Government has started well by facilitating the passage of two pieces of Green-Alliance promoted legislation; for example Laila Harre's bill to legislate for 12 weeks paid parental leave following the birth of a child.
The benefit to the Alliance is that it can differentiate itself from Labour by being seen to be making a constructive contribution to this Parliament and by being willing to make a constructive contribution to any Parliament, regardless of whether it is a part of the Government. That will give people a reason to vote Alliance (or Green) instead of Labour in the next election. (The 3 Green MPs are still part of the Alliance caucus, although two of them will stand for the Greens instead of for the Alliance at the next election.)
The other benefit to the Alliance is that such action can restore the reputation of MMP in the public mind. The Alliance needs to promote MMP as well as promoting its philosophies and promoting a centre-left government in the next Parliament. (If we leave Winston Peters to take the lead in promoting MMP, then proportional representation in New Zealand may be doomed. Too many people are turned off by Peters.)
Labour is ambivalent about proportional representation. Labour simply wants power, on Labour's terms, just as soon as it can get it. The Alliance can afford to wait. It will do itself the world of good by (i) actively participating in the success of the first MMP parliament (as distinct from the first 2 MMP governments) as an MMP parliament, and (ii) using its leverage to pressure the National Government into a lurch to the centre.
At the moment, Act poses the biggest risk for the survival of the minority National Government. National will have to placate Act if the Alliance does not act to defuse Mr Prebble's threats.
Why are we too Scared to Change our Flag?
(6 September)When two issues in particular are brought to our attention, the response is surprisingly conservative. Those issues are that of New Zealand's flag, and the related issue of New Zealand becoming a republic. It is apposite that the issue of the flag was raised a few days ago by Marie Hasler, the new Minister for Cultural Affairs, because today is the fiftieth anniversary of "the day we untied the apron strings" (headline of article by 'official historian', Jock Phillips; NZ Herald, 5 September 1998, p.H2).
The conservative response typically takes the form of, "why change when we have so many more important issues to address?", although it sometimes takes the less irrational form "if it ain't broke, don't fix it". (The latter slogan differs subtly but significantly from the unofficial Treasury slogan: "if it works, fix it".)
Mike Moore, a vigorous promoter of free trade gave a particularly strong rendition of the first response on Holmes (TV1) last week. It was obvious that the thought of replacing the flag (introduced in 1902 during the peak years of empire sentiment following the Boer War) with the British Union Jack and the Southern Cross distressed him very much. But he would not even talk about the flag. He simply said we had to do other things, such as adopting the policy proposals in his new book 'modestly' titled A Brief History of the Future. Brought onto television to talk about the flag, Moore did everything he could to stop the discussion reverting to the topic of the flag.
The "free trade versus protection" ideological divide of the late nineteenth century was as much about nationalism versus colonialism as it was about economics. The protectionists wanted New Zealand governments to promote manufacturing, and they wanted trade to be essentially multilateral, with New Zealand presenting itself to the world as its own nation. The free traders on the other hand wanted "empire free trade"; an economy based on a division of labour throughout the empire, with NZ being a land of grass, sheep, and Jersey cows. The mother country would do the manufacturing, while New Zealand, her most loyal daughter, would ensure that mum would never go hungry (or vegetarian).
Phillips says: "In 1931 Britain had passed the Statute of Westminster. This removed the right of the British Parliament to enact laws covering the dominions. But significantly New Zealand had chosen not to adopt it. We did not want that degree of independence." These New Zealanders are very different to those very independent spirits who James Belich (Making Peoples, 1996) depicts as having settled here in the mid-nineteenth century with the ambition of creating a Greater Britain of the South. Following the advent of refrigerated shipping, New Zealanders spend the years from around 1895 to 1945 tying the apron strings; it was a period that Belich describes as "recolonisation".
We finally passed a "Citizenship Act" in 1948.
It seems to me that we still haven't actually untied the apron strings. Most of the untying that took place in the last 50 years was actually initiated by Britain; eg her entry into the European Economic Community as the European Union was called in 1973, and her defence withdrawal from Singapore.
We feel very isolated in the South Pacific, and that we need to at least pretend that Britain is still mum. But it is not politically correct to say that we still want to be close to Mother Britain's skirts. (As a nation, we are like the 30 year adult who still lives "at home".) Hence we skirt around the issue, saying that other things are more important.
The cartoon by Ellison in the Sunday Star-Times (6 September 1998, p.A8) is in this vein. It says "Cabinet moves quickly to lift the Spirit of the Nation", and depicts an impoverished child waving a black flag with the well-known Silver Fern emblem, crying "Yippee!".
I sometimes wonder if a majority of New Zealanders are hoping, subconsciously, that Australia will get on with changing its flag, thereby removing the most prescient reason for New Zealand having a new flag; ie the fact that the New Zealand flag is so similar to the Australian flag. Perhaps we want to be Britain's only loyal daughter, the youngest daughter who ought to stay at home to look after Mum in her dotage?
I really liked the flag designed in the 1980s by Friedensreich Hundertwasser, the Austrian sometime New Zealand resident, world famous for his design of a Vienna apartment block. It was a green and white design, based on the colour of New Zealand's unique rainforests, depicting the stylised curves of a unfolding fern frond. I suspect that many New Zealanders rejected the design in part because its author was foreign.
The silver fern on the black background is also a good design; a design readily identified around the world, distinctive, and that makes us feel distinctive. The only problem is that we still have a deep-rooted subconscious yearning to not be distinctive, to still maintain that psychological umbilical chord to Mum.
Colonial cringe is alive and well in this part of the South Pacific. It's not just a matter of the resistance to change by the generation that fought in World War II. That yearning has carried over to our young people.
We can make our way in the increasingly bad big world, despite economies seeming to fall like dominoes. Just let us not follow Mike Moore into the jaws of predatory capitalism with nothing to protect us from its vicissitudes except a flag with the Union Jack of Mother Britain on the top left corner.
There may be more important issues to consider than our flag. But that's no reason to not consider creating a genuine national flag, as Canadians did about 30 years ago.
Demonstrating in support of ENZA's Monopoly
(5 September)Today, the Prime Minister, in Hawkes Bay, was subjected to demonstrations by orchardists opposing the Government's proposal to remove that statutory monopoly held by producer organisations such as ENZA (formerly the Apple and Pear Marketing Board).
On the surface, the government's policy is an example of pure altruism in favour of foreign consumers over New Zealand producers. ENZA is constituted as a monopoly "single desk" exporting company of New Zealand pip-fruit. It's collectivist purpose is to maximise the returns to New Zealand growers. The revenues to ENZA's owners are greater than they would be if growers were competing against each other; it's a simple "Prisoners Dilemma" situation in which 'collaboration' achieves the best outcome for New Zealand Incorporated.
The argument for breaking up monopolies - that the gains to consumers exceed the losses to the shareholders of the monopoly supplier - may be correct. But it is the role of the New Zealand Government to act for the New Zealand producers and not for the foreign consumers. If this trust (ENZA) is to be bust, then the trust-buster should be an international agency. The New Zealand government is acting unilaterally, with the likely outcome being a redistribution in which New Zealanders are the losers.
The anti-trust argument that monopolies are the font of all economic evil is overstated. There can be dynamic gains to economies which include some degrees of monopoly. Monopolists have more latitude to innovate (ie in ways that are beneficial to others as well as themselves), and many do just that. Microsoft argues that its contribution through innovation is a bargain for global society, and that the world would be the loser if that bargain was to be legislated away. New growth economist Paul Romer agrees with Microsoft chief executive Bill Gates, while accepting that there is a line that a monopoly provider can cross. When that line is crossed, external diseconomies arising from its monopoly power exceed the social economies arising from its innovation.
Thus it is a moot point whether the world will be better off if ENZA ceases to be the sole New Zealand brand for pip-fruit exports. What is not moot is that the present value of ENZA will fall once it loses its privileged status. That amounts to a confiscation of the property of all those who hold implicit or explicit equity in ENZA. Today's demonstrators hold explicit equity in ENZA. The citizenry of New Zealand hold implicit equity in ENZA.
The Government, which is meant to represent the economic interests of New Zealanders, is doing the very opposite. It is representing the economic interests of people whom it does not represent. That can only happen where the directors of an enterprise (in this case, the Shipley Government) are not accountable to the equity holders. While the New Zealand government may be of a generally altruistic bent, it seems more likely that this Government is accountable, de facto, to other parties whose interests conflict with those who have an interest in maximising the prices of New Zealand's exports.
International capital, as the personification of an economic class, expects mere commodity producers to be subject to the full discipline of market competition. From that point of view, apple growers in New Zealand, banana growers in banana republics, and tin miners in Bolivia should all be receiving zero 'economic profits'. The winners of this heightened competition are not apple and banana eaters, but are the stakeholders of the transnational companies that control the distribution and processing of commodified goods. (International capital is the contemporary equivalent of the Ricardian landlord interest or the Marxian capitalist.) There are now enough people in New Zealand who identify with international capital for them to see their interests as being in conflict with the aims of national organisations such as ENZA which support national capital. (National capital, as represented by the Hawkes Bay orchardists, is the contemporary equivalent of the Ricardian capitalist, or the Marxian petit-bourgeois.)
Whoever's interest the ongoing "liberalisation" of the New Zealand economy is serving, it is not that of national capital, and it is certainly not that of national labour. Nor is it obvious that the main beneficiary is the international consumer, if we take the international consumer to mean the customers of Sainsbury's. Liberalisation is about changing the factor distribution of income in favour of the dominant economic interest. It's a matter of classical importance in our society today; a society that has forgotten the central sociological context of classical [ie Ricardian] economics.
(3 September)
The Labour and Alliance Parties have decided to introduce an anti-defection law that will prevent MPs from leaving the parties under whose auspices they were elected.
One problem is that it is often the party that leaves the person and not the person who leaves the party. Both Jim Anderton and Winston Peters argued as such in 1989 and 1992 respectively, when their parties left them. Neil Kirton used the same argument when he was sidelined by Winston Peters in 1997.
Will the new law provide for the mass resignation of the MPs who stay with a party that is disloyal to its voters? I can just imagine the 50-plus simultaneous by-elections, in 1989, of MPs, brought into Parliament to pursue Labour Party policies, seeking a renewed mandate to, among other things, sell the nation's assets.
Mike Moore's Simplistic Views on Trade & Protection
(3 September)Today's NZ Herald has a feature on Mike Moore's new book, A Brief History of the Future. It is a paean to the virtues of free-trade and the vices of protectionism. It is also seen as part of Moore's bid to become Director-General of the World Trade Organisation (WTO).
The article contains the following bullet points:
Mike Moore seems to see the protection vs. free trade issue as pure black and white; that there is no middle ground. By insinuation, "protectionist elements" are not bad people, just stupid people.
The reality is that pure free trade can yield the most economically efficient state ("first-best" for short). But pure free trade can also yield a variety of inefficient and dangerous states ("third-best" for short).
It all depends on the conditions. One pre-condition for first-best is the presence of a sovereign government, to act as referee, regulator, and provider of public goods. Within nations the need for a sovereign government is unquestioned. For global free-trade - or, more to the point, global laissez-faire (which includes the free flows of capital and labour) - to produce first-best, there must likewise be an international sovereign, able to act as referee and regulator, and to provide international public goods. The WTO, as constituted, cannot perform that function. It's no more than a cheerleader for international laissez-faire.
Pure free trade in practice is more likely to yield third-best outcomes. The argument against protectionism is that it yields second-best outcomes. In the real world, second best is best, given that first-best is no more than a Platonic ideal state.
More to the point, the real world is not about purity. Nor is the best world the most economically efficient world.
We know that world commerce provides both benefits and dangers to each society on the planet. The sensible approach is for each sovereign people - through their governments - to try to maximise the benefits while minimising the dangers. That requires an eclectic mix of impure free trade and impure protectionism. To use Paul Krugman's word, nations have a right - indeed a responsibility - to "buffer" themselves from the dangers of unstable global economic forces.
The art of political economy is more complex than taking bumper-sticker positions on free trade and protection. It's about finding the golden mean, between the extreme positions. Sovereign governments have a right - no, a responsibility - to protect their citizens from dangers of external origin. What they must not do is to assume that every new thing of external origin is dangerous.
It is good to produce what we produce best (sustainably) for world markets, while buying what others can sustainably produce better or more cheaply than we can. It is possible to experience the gains of trade without adopting a purist ideological stance.
(2 September)
On the news this morning, we were told that Auckland Healthcare wishes to build a new hospital in Grafton to replace Greenlane / National Womens.
I have no idea whether this is a more cost effective option than upgrading the Greenlane buildings, although I do worry about the fact that the Grafton site of Auckland Hospital is, at certain times of certain days, an appalling traffic bottleneck.
The more controversial issue is the suggestion that the building should be built and owned privately, and leased to Auckland Healthcare. The suggestion is that the Government cannot or will not meet the capital cost.
I find this argument about infrastructural funding disingenuous. All large scale capital items - public or private - should be funded via the capital market; indeed via the global capital market. A building such as a hospital, with a specified lifetime of 50 years, should be financed so that the cost of that building is spread throughout that 50-year lifetime.
Thus, the best party to own the building is the party which can raise the long-term finance on the most favourable terms. Always, that party is the government. Governments, with their power of taxation, can borrow money at lower interest rates for longer terms than can other agencies. A public agency such as Auckland Healthcare should be able to raise long term capital finance on equally favourable terms, just so long as the loan is guaranteed by its owners; ie guaranteed by the government.
Under the private ownership scenario, the funds required will be borrowed at a higher interest rate and for a shorter term. The rent payable by Auckland Healthcare will have to be able to cover this higher interest charge, as well as pay a dividend to the shareholders of this private owner. Anyone who can do simple 'rithmetic can see which option is most cost effective.
The reason why the private option appears plausible is that there are in fact three options. The third option - that of public funding without borrowing - is nonsensical; major infrastructure items cannot be funded that way. But by being presented as the alternative to private funding and ownership, it makes the private option look good.
The best means of funding infrastructure is to make use of the credit rating of the most credit-worthy institution in the country; the government.
© 1998 Keith Rankin
