John Key has finally decided to spend some political capital, by moving towards privatisation for ACC. Sad that he isn't spending it on productivity, wages and the things he claims are his top priorities

I'm guessing that when the MMP referendum rolls around in 2011, Nick Smith will be voting for anything but the current system. It's made him look a fool this week as National took the crisis he manufactured for it and went to ACT to help them "fix" it.

Let's have a quick recap. Smith started concocting his crisis back in March when he spoke fearfully of ACC's enormous liabilities. The word "insolvent" was used. He spoke of the "perfect storm" hitting ACC – costs and entitlements growing just as its investment funds were struggling. For a few months at least he was half right; or maybe a quarter right. Unsurprisingly, in the midst of the worst recession in decades ACC didn't make as much as it previously had. In the seven months to January it had made only a 2.73 percent gain.

That's right, a gain. In the midst of recession and a global financial meltdown, ACC's investment team still made money. Heroic. As Rod Oram wrote back in March in the Sunday Star-Times, ACC "outperformed all comparable investment teams in the private sector in New Zealand for the past 10 years and in Australasia for the past seven, earning a return of 8.7% a year". Brian Fallow in the New Zealand Herald accused the government of "shrill scaremongering".

In the same month I pointed out that most of ACC's claimed "blowout" derived from lower returns on government bonds and new modelling in the corporation's annual report. The quickly-ousted chair Ross Wilson had written, "The underlying situation is not worse, it is just reported differently".

Experiencing some resistence for the first time in its term, the government temporarily pulled back. But this month it tried again, saying ACC's financial woes were such it would have to raise levies, and how. It hoped to rush legislation through the House, but found the Maori Party unwilling to play ball. So it turned to ACT.

While Smith had been scaremongering with claims of a blowout, he had conceeded the obvious and said that the government's pre-election plan to look into privatising the workers' account was unnecessary. Smith told the Listener in May,

“The frank advice I’ve given to the Prime Minister is, ‘Look, the exploration of competition in the work account has got a potential to be a major diversion away from the major cost blowouts that are principally in the earners account, non-earners account and motor vehicle account. And why would we want to put all our political effort into the work account that’s in the best shape?"

Then in August, when he kept his fake crisis bubbling along with the announcement of a "stocktake" of ACC to be led by David Caygill, he said,

"Investigating opening up the Work Account to competition is not part of the stocktake and is not a priority of the Government. The scale of ACC's financial problems that the National Government inherited - including the billion dollar blow-out in the Non-Earners' Account - means our immediate focus must be on cost containment."

So what should happen last week but the government does a deal with ACT to, um, investigate opening up the workers' account to competition, leaving Smith hanging out to dry. He puts it down to coalition politics, but in truth Key the pragmatist had a choice. He could have negotiated with the Maori Party, but instead he decided it was time to swing right and dump on his minister in the process.

Is it because the National party has received significant donations from Australian insurance firms? Of course a leaked briefing from his old firm Merrill Lynch last year gave the first indication that this was the path National wanted to pursue.

Is it because he needs to sure up the right of his party? Is it what he believes in? Or is it simply because he can get away with it in his first term, at a time that the recession and his manifesto promises forbid him from doing little else?

I'm not sure any of those are satisfactory reasons on their own. All that's clear is that Key has decided that it's time to spend some of his political capital, and it's insurance companies that will benefit. It's a curiously ideological choice for the supposed pragmatist. It's as if, having spent the recession preaching responsible restraint, he's gone out on a whim and bought himself a couple of investment properties, a ferrari and a spoodle.

(In fact, why couldn't he have just bought a spoodle, rather than put ACC at risk?)

Privatising ACC makes no commerical sense. It is one of the cheapest, most admired accident compensation schemes in the world. While the return-to-work rate is trending down, it's still faster than the state schemes in Australia. ACC's levies are lower and in fact, while I can't now find the website with the comparisons and will have to add it later in the comments, it out-performs the Australian schemes in most aspects.

As the Herald reported last week, even Treasury has doubts:

It says any economic gains could be "relatively modest" in the short term and a change was likely to do little to resolve ACC's cost pressures which were mainly in accounts other than the work account.

Its privatisation will do nothing for productivity or helping close the wage gap between us and Australia – the things that this government claims to prioritise. It is, as Smith says, a major diversion; not from the manufactured blowouts, but from the job of improving our economic performance. This is pure ideology. And as Phil Goff has pointed out, it actually breaks an election promise.

 

My crystal ball offers this prediction of the future... Private insurers will cherry pick the large corporations with lower premiums. At first. Those premiums will climb after a couple of years, and in the meantime ACC will be left struggling with small and medium businesses. Without the big corporate levies, ACC will have to increase its levies on those SMEs further and cut more entitlements. Disgruntled SMEs will be tempted to go private, and ACC will be caught in a diminishing spiral.

Contrary to Rodney Hide's promise that he's only pushing privatisation to ensure the "sustainability" of ACC, this could be the beginning of the end. The risk here is nothing less than ACC, RIP.