Privatising NZ by stealth

by

Sue Newberry

Senior lecturer in accounting at the University of Canterbury, New Zealand

(Published in [New Zealand] The Press, 15 September 2004, A17)

New Zealand’s public services are being privatised by a subversive financial system, writes SUE NEWBERRY. In these two articles, she untangles the little-known details.

We are seeing the decimation of public services - a form of privatisation by stealth. It occurs through hidden detailed financial rules that few understand. It is becoming especially evident today in the health and education sectors.

Privatisation has been a consistent theme since the advent of Rogernomics in 1984.

From late 1987, Roger Douglas was open about his desire to privatise State-owned enterprises. But Douglas’s ambitions extended much further than that.

The framework of New Zealand’s public sector financial system was developed during Douglas’s tenure as minister of finance, and legislated in the Public Finance Act 1989. That framework contains features for privatisation by stealth through financial rules. These features are recommended in how to privatise books such as those held in the Treasury’s library.

A key privatising feature in the legislation is the idea that the government “purchases” public service “outputs” from output providers, and that public sector “output providers” must apply particular costing requirements.

The Legislation Advisory Committee explained that this feature is constitutionally inappropriate. This is because it suggests the Crown “owns” departments and is therefore equivalent to a share investor in them. That advice was ignored, and this purchaser-provider split feature, so essential to privatisation, was pushed through into legislation.

Treasury officials added detailed financial rules to this framework. With privatisation highly unpopular, top Treasury officials adopted what they called in official papers (released to me under the Official Information Act) a “sophisticated approach.”

This “sophistication” involves vague, but nice-sounding language, such as efficiency, performance improvement, and that recently used by the Tertiary Education Commission - “facilitating a greater system of connectedness to wider New Zealand businesses, communities, iwi and enterprises” (Polytechnics Caught in Numbers Trap, The Press, August 21). The “sophistication” also involves biases designed into the detailed financial rules. These biases effectively rig the financial system to produce pre-determined outcomes. They hard-wire the privatisation agenda into the detailed financial rules.

Some might call the vague language and biased rules “sophistication.” Others might use less complimentary terms.

This biased financial system operates as a pincer movement. One wing of the pincer withholds and extracts money from public services. This causes financial distress and service failure. The how to privatise books promote this process for running services down to sub-standard levels while avoiding ideological debate. For some deteriorating public services, market-based alternatives may emerge. Other public services just disappear.

The other wing of the pincer uses accrual accounting to inflate reported costs of public services. This gives the potentially misleading (sophisticated?) impression that publicly provided services cost too much and would be more “efficient” if contracted out.

It also allows the impression to be created that increasing amounts are being spent on those services. Accrual accounting book entries are not money, and it is money that is necessary to operate the services. The first wing of the pincer movement deals with that.

With slight variations, these biased financial rules operate throughout the public sector. They have been developed, implemented and are enforced by central agency officials. The rules cause service and financial problems. When things go wrong as they inevitably will, or services are near collapse, central agency officials have an excuse to intervene.

Blame for inept management is heaped on those running the particular services. In the business world, this is a game known as Ambush. The ambushed party gets to carry the total blame, and attention is diverted from those others who caused, or contributed to, the problem. Those making and imposing these damaging financial rules escape attention.

The TEC report on the Christchurch Polytechnic Institute of Technology (CPIT) exemplifies this blame-heaping process. The terms of reference ensured TEC’s role escaped scrutiny. The Numbers Trap article revealed the pressure imposed on all polytechnics, and identified four other polytechnics involved in similar deals. No doubt there are more.

Ambushing CPIT won’t resolve the much larger problem. If we are serious about tertiary education in New Zealand, we should look at the TEC, and we should probably also look at the Ministry of Education.

This deceptive financial system is now so extensive and complicated that few, if any, politicians can hope to understand it. The information produced from it deceives Parliament, the voting public of New Zealand, and, it seems, many of our government ministers.

It probably also deceives many officials within the Treasury and other central agencies. I suspect that most just apply the system without understanding it, and that very few, if any, are left who do understand the destructive nature of the system.

In a democracy, important political decisions should be debated publicly.

If the voting public agrees we should not have public services, then those services could be either wound up or disposed of openly. Instead, this subversive public sector financial system decimates our public services, and manipulates public opinion into accepting privatisation by stealth.

New Zealand’s deceptive public sector financial system is about to be made even worse. The omnibus Public Finance (State Sector Management) Bill returned to Parliament last week after the select committee process.

This Bill extends the Treasury’s power to develop and enforce its biased and damaging financial rules. Expect to see the decimation of publicly provided services, including education and health, gather speed.

The bill also contains grave dangers for taxpayers. In a democracy Parliament’s role is to protect taxpayers and citizens.

Unlike shareholders in a company, taxpayers’ liability for public debt is unlimited. Parliamentary scrutiny and control over spending public money and incurring public debt is fundamental to a democracy. We are in danger of totally losing that control.

Despite claims about improved parliamentary control achieved from the Public Finance Act 1989, the opposite occurred. Parliamentary scrutiny and control was considerably weakened. Few have noticed or complained. Lack of public and parliamentary attention to purportedly technical financial matters is dangerous. Urgent attention is essential.

The Public Finance (State Sector Management) Bill proposes exposing taxpayers still further by weakening what little Parliamentary scrutiny and control remains. It delegates through the Minister of Finance to officials the control over public money, the power to incur public debt, and to engage in derivatives market activities.

It also promotes the interests of New Zealand’s international finance creditors over the interests of our taxpayers and citizens.

It is worth quoting a few sections from clause 17 of the Bill to illustrate the risks. Much of this is not new, but the bill will extend the delegated powers and strengthen the enforceability of any public debt.

The bill allows the Minister, without parliamentary scrutiny, to borrow on behalf of the Crown (section 47). The minister may also appoint borrowing agents, and with the Treasury’s permission, the borrowing agents may appoint other borrowing agents (sections 50 and 53). According to section 52 all such borrowing is lawful:

“Any money that appears to have been borrowed by the Crown under this act must be taken to have been lawfully borrowed within the powers conferred by this act.”

So too, is it lawful for the minister to engage in derivatives activities (s. 65G). The Treasury, through its Debt Management Office, will perform this task.

The Bill puts the repayment of borrowing beyond Parliament’s control (s. 60).

“All principal payable in respect of money borrowed by the Crown must be paid, without further authority than this section; and must be paid from a Crown Bank Account or, if the minister directs, a departmental bank account.”

So too, is the payment of amounts due on derivatives beyond Parliament’s scrutiny and control (s. 65H).

This set of arrangements may be compared with giving your credit card to children, allowing them to take it to the casino if they wish, and allowing them pass it around their friends. Who would be silly enough to guarantee in full the resulting debt?

That is exactly what we do with public finance. Having delegated the various financial activities, thus allowing them to escape parliamentary scrutiny and control, we back the resulting public debt with an unlimited taxpayers’ guarantee (s. 55):

“All principal, interest, and other money that is payable in relation to money borrowed by the Crown is a charge on, and payable out of, the revenues of the Crown equally and rateably with all other general borrowing obligations of the Crown.”

Our public finance system is already privatising our public services by stealth. Now, with this bill, Parliament is contemplating extending that subversive system.

Parliament is also contemplating renouncing the last remnants of its essential powers of financial control, and to allow the use of taxpayers' money to build a capital market.

The Debt Management Office is an arm of the Treasury. According to its web-site, the office’s “debt management framework also assists other public policy objectives. It seeks to enhance the development of the domestic capital market, including a derivatives market for managing risk, and to reduce the cost of capital for private-sector borrowers by improving New Zealand's sovereign creditworthiness.”

This policy suggests New Zealand’s taxpayers are subsidising financial interests, possibly international financial interests.

Has the use of taxpayers’ money to stimulate financial market activities ever been debated in Parliament? Does anyone remember Barings Bank? Or Long Term Capital Management? Or Enron?

If passed into law, the clauses in the Public Finance (State Sector Management) Bill will expose taxpayers to permanent and total guarantees of all delegated financing and derivatives market activities. The dangers are obvious. When we lose control over public finance, we lose democracy.

Now that this bill has returned to Parliament, perhaps we should heed Michael Moore’s (Fahrenheit 9/11) example. We should demand that our MPs each sign a declaration they have read and fully understand this bill before debate commences.

Parliament should not renounce what little control of public finance remains; it should wrest back the control it has already given up, and give these serious financial matters the attention they deserve.

 Further information on the Public Finance (State Sector Management) Bill can be found on www.anewnz.org.nz (Hot Topics: “A threat to our democracy”).