How do officials think about the costs of expropriation?

The government has introduced legislation which will allow the Minister of Health and the Director General to take over private companies doing COVID testing (further description is here). The likely target of this change is Rako, which has sought a commercial negotiation with the government for the last year. The amendment, which is before the Select Committee, will give the government the option of taking Rako’s property and unilaterally determine compensation.

So, what do officials see as the costs of de facto nationalisation of COVID testing?

Here is what the Ministry of Health has to say in its Fact Sheet 5: Regulating COVID-19 laboratory testing and managing testing supplies and capacity:

The proposed change will not have any direct impacts. Orders made under the new provision may impose obligations or restrictions on testing laboratories to ensure quality of testing, integration of test results with the public testing repository and regulation of testing consumables.

It is important to note that an Order to requisition supplies or redirect capacity to the public health response would only be made if there was significant COVID-19 resurgence where there is insufficient testing capacity in the public system.

Here is what the Regulatory Impact Statement says about costs:

There may be modest costs to the Crown in administering any regulatory regime should this be required. There may also be administrative and other costs for public/private laboratories depending on what is proposed. These costs would be assessed at the time any order is made.

The RIS essentially repeats that last sentence when it says, “A full cost assessment would be undertaken should a COVID-19 Public Health Order (Order) be proposed using the new provisions.”

As for benefits, the RIS says “[t]his proposal will ensure flexibility in the legislation to make orders to effectively manage laboratory testing (if required) to ensure appropriate regulation of quality control and minimum standards in relation to testing, integration of COVID-19 test results into the public health, management of the supply of testing consumables.”

Set aside the fact that officials who cannot secure MIQ or order vaccines on time obviously cannot deliver any of those benefits.

Focus on costs. Officials seem to operating with a cost model that threatening to take a company’s IP is costless, and costs crystalise only when property is actually taken.

I wonder what Rako’s investors and employees think about that view? In fact, I wonder what every owner of intellectual property in every sector thinks about the Ministry’s view.

Because the cost of taking companies’ property is not the administrative overhead, as officials suggest in the RIS.

The cost is all the investment in innovation that will not happen in the future.

Those costs are large, big enough to be measured in percentages of GDP. So it is laughable that officials could list administrative costs as the only real downside of their proposal.

Do officials at the Ministry of Health understand how investment in specific assets works? Do they understand that investment in intellectual property, and in all sunk assets, depends on the credibility of the government’s promise not to take the property once it is created? Do officials recognise that even threatening such opportunism in one sector could have wider ramifications about security of property elsewhere? That prospective investors in wind turbines or EV charging infrastructure won’t notice the government putting in place machinery to take the property of medical companies?

Could officials and the government be any more short-sighted?

3 thoughts on “How do officials think about the costs of expropriation?

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