Published in the Telegraph-Journal 7rd February 2012
With the New Brunswick government reviewing all options to reduce its debt and get annual budget deficits under control, it’s useful to review what the limits of those options might be. Beginning in the second half of the twentieth century, governments around the world have sold off state-owned assets to private investors, not only as a way to generate revenue but in response to charges that government should not be directly involved as owners in some business activities. The privatization revolution has included such assets as airports, railroads and energy utilities. This phenomenon has overthrown the widely held belief that governments should own some of the most important industries in the economy. The consequences of privatization have included reduced costs, higher-quality services and increased innovation in formerly unproductive or moribund government industries. But privatization is not without its controversy and detractors.
In 2003, the U.S. Office of Management and Budget calculated that about 50 per cent of all federal employees have responsibilities that are not inherently governmental. Some attempts have been made to outsource some of those activities to outside suppliers, but competitive sourcing is not privatization. And governments have taken a page from the business sector to consolidate some processes under the rubric of shared services. Outsourcing and shared services have their own merits and drawbacks, but privatization involves making an activity entirely private and removing it completely from the government’s financial ledger.
How far could privatization be extended in New Brunswick? Many provincial assets could be privatized, including infrastructure such as airports and highways. The government also possesses millions of dollars of real estate for which there may be no requirement that they be publicly owned and which could be sold. The benefits to the provincial budget of privatization may be modest, but the benefits to the economy would be more expansive as private sector businesses would innovate and improve their performance.
In principle, privatization promotes greater innovation and dramatically reduces cronyism, a serious hazard of government contracting. But there are other arguments in favor of the privatization of government assets. First, sales of provincial assets would reduce the budget deficit. Second, privatization would reduce government responsibilities so that policymakers could better focus on their core responsibilities, such as health care and education. Third, privatization would encourage economic growth by opening new markets to entrepreneurs.
Some policymakers think that certain activities are too important to leave to the private sector. But the reality is just the opposite. Government has not always shown itself to be capable of providing efficient and effective service delivery. Another criticism of privatization is that, because the business sector is motivated by profit, it is unable or unwilling to serve the public good, but service level agreements and carefully worded contracts would dramatically reduce this risk.
A key advantage of privatized assets is that private companies can readily access debt and equity markets for capital expansion to meet increasing demand. However, the modernization of government infrastructure is subject to the uncertainties associated with government budgeting. The result of this is that government infrastructure is often obsolete and poorly maintained.
Privatization has its drawbacks and it will not find support everywhere. But budget pressures will increase in the foreseeable future in New Brunswick. Provincial asset sales would help reduce the provincial deficit and create budget room for better maintenance of critical assets while economic efficiency and growth would increase as underused assets were put into more productive private hands. The public is faced with choices about what government will be able to support and it is becoming clear that some sacrifices will need to be made. Even if it is soundly resisted, privatization needs to be on the agenda.