Corporatisation, Privatisation and Public Law
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CORPORATISATION, PRIVATISATION AND PUBLIC LAW Professor Michael Taggart LLB (Hons) (Auckland), LLM (Harvard) An Inaugural Lecture presented in the University Hall, Old Arts Building, University ofAuckland, New Zealand on Wednesday, 12 September 1990. r I PREFACE Adapted from introductory remarks by Professor Brian Coote, Faculty ofLaw, University ofAuckland Michael Bruce Taggart was born in Auckland in 1955. After attending Mt Albert Grammar, he came to this Law School in 1975 and in due course graduated LLB (Hons). There followed an exceptionally success ful term as clerk to the Supreme Court judges at Auckland. He then proceeded to Harvard, from which he graduated LLM in 1980. Thereafter, he spent a couple of academic years teaching at the Law School of the University of Western Ontario before returning to this Law School as a Lecturer in Law. He was promoted to a Senior Lectureship as from 1 February 1987. So far, so good. But then came the unusual part. Within months of his becoming a Senior Lecturer, he had been appointed to a full Chair and, incidentally, had become the University's youngest Professor and, with Julius Stone, one of its two youngest-ever Professors of Law. Of course, such things do not happen without reason. The new appointee had accumulated a dazzling list of scholarships and awards and fifteen or so substantial pieces of writing had already appeared in legal publications. Regard would also have been had to his proven qualities as a teacher, as an administrator and as a person. For me, though, what distinguishes him most are qualities he had evidenced while he was still an undergraduate. I refer to his sheer love of and enthusiasm for the law and the effect that has had, and continues to have, on those around him. Just as I warmly commended Professor Taggart to his audience, so now I welcome and commend this permanent record of his inaugural lecture. J J i' CORPORATISATION, PRIVATISATION AND PUBLIC iAW "A public lawyer", Sir Ivor Jennings once wrote," ... is the child of his age. His ideas are affected not only by his own upbringµig, but also by the floating ideas of the time at which he writes" .1.The "floating ideas" of our time have been those associated with the catchphrase "Rogernomics" - briefly put, they are the pursuit of economic efficiency, the glorification of the private· sector and the retreat of the State.2 My purpose tonight is to examine, from a public law perspective, two related manifestations of these ideas - corporatisation and privatisation. The Hon Roger Douglas has said that the corporatisation pro gramme proceeded from three "basic principles''.3 First, State trading activities should have purely commercial objectives. Sec ond, State-owned enterprises should operate in a competitively neutral environment, subject to the same rules as any other busi ness. Third, the enterprises should be organised in a form designed to assist in the implementation of the principles of commercialisa tion and competitive neutrality. The first objective, commercialisation, involves separating out ~ tjhe commercial objectiveLof public enterprise from the non "unciaVVL 1a.~ommercial or(social objecti~4 Too often in the past, it is said, ~~rferecrm the running of State enterprises for short-term political reasons - for example, to promote regional development, orto create employment or provide low cost housing. This i~ now unacceptable, it seems. Burdening public enterprise with the performance of social objectives is said to make it difficult, if not impossible, to hold the managers accountable for the commercial performance ofthe enterprises; thereby diminishing financial accountability. 5 It should be Ministers of the Crown who make decisions on social policy, we are told, and not the managers of public enterprises. 6 Ministers are politically accountable for those decisions and can decide to meet these objectives direc;tly through taxation or by the transfer of payments to the State enterprises. 1 2 CORPORAl'ISATION, PRIVATISATION AND PUBLIC LAW This thinking finds expression in the State-Owned Enterprises Act 1986; the legislation which laid the foundations of corporatisation. Section 7 provides that where the Government wants a State-Owned Enterprise or, as I will refer to it, a SOE to supply goods or services of anon-commercial nature, the Govern ment must agree to reimburse the cost to the SOE of providing that . service. The prevalence of mixed commercial and social objectives in the running ofpublic enterprises prior to corporatisation suggested that a good number of section 7 agreements would be entered into. In 1986 the·Rt Hon Geoffrey Palmer had "[n]o doubt that [would] happen in quite a number of areas". 8 In fact, the semi-official total of the number of section 7 agreements entered into by the Labour Government in nearly four years is just two.9 The Government reimbursed NZ Post the operating costs of 600 "uneconomic" Post Offices for the first year after corporatisation.10 The Government also· paid· for the provision of mobile banking outlets by Post Bank.u Why have so few section 7 agreements been entered into?12 Part of the explanation might be that there is no reason why arrange ments for reimbursement must be made under section 7 .13 But my research and requests of Government have failed to turn up any reimbursement arrangements outside section 7. If there are any such arrangements, they are likely few in number or well hidden, or both. It is difficult to resist concluding that the reason few reimbursement arrangements have been entered into is because Ministers do not believe thatState enterprise should perform social objectives. The formal separation of commercial and social ob jectives envisaged in the SOE Act has resulted, in practice, in the negation of social objectives.14 This, as we will see, was an important step on the way to privatisation. 1 Related to this is the second principle of SOE reform identified I by the then Minister of Finance: State-owned enterprises are to operate on an equal footing with private enterprise in pursuing commercial objectives. This means that State enterprises should , not enjoy any unfair commercial privileges or operate under any !11 requirements which place SOEs at a commercial disadvantage.15 CORPORATISATION, PRlVATISATION AND PUBLIC LAW 3 Consequently, SOEs no longer enjoy the common law immunities of the Crown,. and·monopoly powers conferred by statute have been removed. Public and private enterprise are to compete in the market on a "level playing field". Not surprisingly, die legal structure chosen to implement these basic principles of commercialisation and competitive neutr~ity was the epitome ofprivate sector enterprise.; the public company.16 By the State-Owned Enterprises Act 1986, nine new SOEs were incorporated as companies under the Companies Act,17 and an other five existing companies owned by the Crown were brought under the SOE regime as wen.1s Several more enterprises have been added to the Schedule in theSOEActsince 1986~19 and, as we will see,manyhave been removed in preparationforprivatisation. 20 Indisputably the SOE reform was, and still is, driven by the belief ( of economists and others) in the superiority of the. :mar ketplace and the efficiency ofthe private sectorfimi. It is impossible to fully grasp features of SOE reform (and, also, the later shift to privatisation) withoutknowing a little ofthe economists 'theorising about the private firm.21 In the private firm the owners of the assets(called shareholders) do not manage or control the firm in any direct way; this is done by professional managers (called directors). Thus ownerslnp and control are separated, creating an "agency" problem. The problem is how to ensure that the directors (as agents of the shareholders) run the firm in the most efficient way possible for the maximum benefit of the owner-shareholders. The share market is said to provide many incentives for managers to serve the interests of the owners. The share market will evaluate performance of the firm and its managers, and this assessment will be reflected, to some extent, in the share price. Shareholders dissatisfied with manage rial performance can "exit" from the firm, by selling their shares. Alternatively, shareholders may ''voice" their dissatisfaction at the annual general meeting and attempt to vote out management.22 Also, the threat of takeover provides some incentive for incumbent managets to behave in the shareholders' interests. And, in the extreme case, there is the threat of insolvency. _ Economists rightly point out that merely by imitating the 4 CORPORATISATION, PRIVATISATION AND PUBLIC LAW corporate form, public enterprise will not be able to replicate the benefits of private enterprise. All of the monitoring mechanisms touched on a moment ago are less effective or non-existent in the SOE context. SOE shares are non-transferable, there is no share ijprice and so takeovers are impossible. Nor is there a realistic prospect of insolvency. Moreover, while politicians can dismiss managers for unsatisfactory performance, they are unlikely to do so. Because of the nature of the political process - with concen trated interests such as employees and consumers exercising significant influence-politicians are likely to injectnon-commercial objectives into public enterprise and thereby further weaken in centives to replace management which is performing poorly. Undeterred by the misfit of public .enterprise with the theory of the private firm, the framers of the SOE legislation