Full Circle: rail industry privatisation in New Zealand and a new theory of its fundamental conceptual weaknesses

Abstract

The privatisation of state-owned assets a defining characteristic of the 1980s was not restricted to the United Kingdom. In New Zealand the Labour Government which took office in 1984 was committed to a policy of what was known at the time as 'corporatisation' - converting government departments and other agencies which had commercial functions into proper commercial entities and then privatising many of them. The railway operation had already been converted to a commercial structure in 1982 and it was eventually privatised in 1993. However it was how the markets in which the railway operation worked would develop that would prove to be 'a bridge too far' for the railway's privatisation. Although the network had not been split out in the sale process as it was in Great Britain the whole company eventually had to be saved from bankruptcy. It has now been repurchased completely. The purpose of this paper is to examine the situation in New Zealand and then to compare it with other industry privatisations which have worked. This paper will argue that the critical difference between rail and other formerly nationalised industries lies in its subsidy requirement - what people are prepared to pay for railway services only rarely bears any relation to what those railway services cost to provide - and further that those services are provided by an effective monopoly. It is the combination of these two aspects which proved fatal for the New Zealand rail privatisation (that is once the rail freight market went into failure) given the clear Government desire to retain the railway network at its current extent. The paper's structure is as follows. First it looks at the way that the railway in New Zealand was privatised. Second it introduces a model of industry structure as an explanatory variable for understanding why many privatisations within the transport sector and elsewhere have worked and some railway ones have not. Third it argues from that basis as to why privatisation could not have worked under these circumstances. Fourth it provides some comment on the implications of this for public policy including that in a British context.