Morris's Laws of Privatisation

Distilled from a career in investment banking and a lifetime of observation.

1. As a rule of thumb, where a firm operates in a competitive industry (as with the airlines or

banks, for example) it is generally better to have it in the private sector.

2. As arule of thumb, where a monopoly may be removed or reduced in scope (as with the

removal of competitive electricity generation from the generatiot/transmission monopoly) it

is generally worth doing so, and privatising the competitive part.

3. As a rule of thumb, where a firm operates in an industry in which dynamic efficiency is ofoverriding importance (requiring rapid response to changing fashions or rapidly evolving

technologies or business models) it is generally better to have it in the private sector.

4. As a rule of thumb, where an industry is labour intensive and not capital intensive, there

are often real efficiencies to be gained by privatisation, or by contracting out the labour

intensive components.

5. As a rule of thumb, where an industry uses specific assets having no alternative use, and

serves a small number of identifiable customers, it is generally better to have it owned by

those customers, possibly as a cooperative. This might apply, for example, to dedicated

mineral railways.

6. As a rule of thumb, risks should be allocated to parties best able to assess them and manage

them. Risks should be allocated in such a way that a party which takes a higher risk or incurs

a higher cost receives the benefit from increasing that risk or incurring that cost.

7 . As arule of thumb, government is the cheapest source of finance even after adjustingfor

business and default risl<s. lnequity and in debt, market capitalisation and issue size

respectively have "liquidity" effects, with the largest capitalisation firms and largest issuers

of debt able raise finance more cheaply than smaller firms and issuers, or those with

idiosyncratic risks, even after adjustingfor those rislrs.*

8. As a rule of thumb, people tend to underestimate the value of control andflexibility, often

ignoring them altogether. Transferring control to another entity - or forgoing the flexibility to

deal with revenues or assets in the future - represents a real loss. This is especially true in

integrated businesses or networks where transferring control of one patt may effectively

mean transferring control of all.

9. As a rule of thumb, privatisation of an irreducible monopoly improves internal efficiency

at the expense of allocative efficiency. Attempting to restore allocative efficiency through

regulation tends to reduce internal efficiency again.

10. As a rule of thumb, privatised monopolies seek to capture regulators and govemments to

improve the terms of their regulation. In dealing with regulators and governments, private

monopolists have the advantage of information asymmetry and incumbency.

1 1. As a rule of thumb, tax farmers seek to renegotiate the terms of their farm. The

advantage of incumbency allows them to present governments with a "take-it-or-1eave"

proposal.

12. As a rule of thumb, where an industry is capital intensive and - whether it be publicly

owned or privately owned - the investment decisions are ultimately made by the government

(as in most infrastructure businesses, and many businesses in which extemalities and network

effects are significant) finance costs are of overriding importance. In the absence ofidentifiable real efficiencies there is lifile to be gained by privatisation.

13. As a rule of thumb, purely financial transactions and tax farming arrangements (selling

forward revenue) incur liquidity inefficiencies with no offsetting real efficiencies and there is

liule to be gained by privatisation.

14. As a rule of thumb, in the absence of identifiable real efficiencies it is preferable to retain

an irreducible monopoly in the public sector and contract out its individual functions, and it is

preferable to retain revenue streams within the public sector and finance them with the most

liquid govemment debt.

15. As a rule of thumb, under a system of purely elective govemment, the proceeds ofprivatisation (including both cash and repayment of existing public debt) will be squandered

by politicians trying to buy votes. The squandering may occur under the government or partyresponsible for the privatisation or it may occur under a subsequent government or party.

16. As a rule of thumb, an "independent" financial adviser, economic adviser, or probityauditor will always find a way to justify a proposal which is highly desired by the politiciansor govemment offrcials who appointed him or her.

AND REMEMBER

" Financing is not funding."

Funding is the revenue - from whatever source - which pays for services and infrastructure.

Financing refers to operations within the capital markets to bridge the timing gap between

the outlay of funds and the eventual receipt of funds.

Private financing does not increase funding.

Inefficient financing means a reduction in the net funds available to pay for services and

infrastructure.

' For a 20 year annuity at 5%o, a 25 bp "illiquidity premium" represents a capital loss of 1.9o , 50 bps a capitalloss of 3.7% and 100 bps a capital loss of 7.1% This is "pure loss" with no offsetting benefit.