Is New Zealand backsliding?

The New Zealand story is well known. In the span of about a decade, the country went from the most regulated and socialistic OECD member to about the freest. But there have been few positive political developments since the early to mid 1990s, and a number of negative changes.

Just a few days ago the New Zealand government renationalized the rail system for the price of NZ$1. The previous owners, Tranz Rail, had underinvested in the system and in fact stripped it of capital. Here is one bitter, anti-market account; they even complain that the private owners lived in Wisconsin, not New Zealand. Here are some earlier complaints. In response a left wing government renationalized the whole thing.

Did privatization fail? It is unlikely that New Zealand should have a rail system in the first place. Imagine 3.6 million people living in a country about the size of California. About one-third of them live in or near Auckland. The rest are widely scattered across two (technically, three) islands. When you privatize something that shouldn't exist in the first place, you are asking for political and economic trouble. It is no surprise that the company wouldn't invest much in the system.

Unfortunately this is not the only instance of backsliding. In late 2001 the government bailed out Air New Zealand to prevent a bankruptcy. The government put up US$567 million in return for 83 percent of the company. It was never the case that flights to and from New Zealand would cease or even dry up. But there was never any guarantee that a New Zealand company would be controlling those flights; read this whinge about a possible Qantas takeover. Again, privatization may well have been economically efficient, but it didn't deliver what people expected or demanded.

There has long been a Kiwi "mythology" that the country, due to its flexible Westminster system of government, reformed in ways that its Australian neighbor could not. Yet the slower, more federalistic Australian reforms are now appearing to have longer legs.

For more information on both renationalizations, see also the 2 July issue of The Financial Times.

Addendum: A very smart New Zealander (I know him a bit) wrote me the following...

Re the railways, the government has actually bought up only the track, while new private sector owners now own and run the operating company. It is probably a little unfair to suggest that the purchase was the (direct) result of widespread voter dissatisfaction - Tranzrail, the previous private sector owner, had almost ended up in liquidation. Without that trigger, this government would have had no great appetite for getting back into ownership of railways. Also, there is at least a case that the lines should always have been separated from the operating business.

As for whether rail should exist in New Zealand, I think that is still an open question (although, like everyone, I was surprised at what the original bidders paid at privatisation in 1993). The issue is not about passenger services, except, maybe commuter lines in Wellington - the population is too sparse for economic inter-city services - but about a limited network for freight needs (mainly bulk dairy and forestry). The very sparseness of the population, and the rugged terrain, also makes good quality roads a challenge to justify/maintain.

As for Air New Zealand, perhaps one can say only two things for the defence. First, late 2001 was the worst time to be relying on new operators to provide longhaul airline services (recession and 9/11) and, sensibly or not, almost any government in the world would have done the same thing at that time. And second, at least so far it looks to have been a good deal financially - Air NZ was sold for more than the government bought it back in 2001, and its market value is now above the latter price. As for the Qantas deal, the curent NZ government has actually been quite supportive of it, but the transaction was blocked by competition authorities on both sides of the Tasman (concerned about extreme market dominance on NZ domestic routes and most (non-auckland) trans-tasman routes.