A third way on asset sales
If there is one word that best describes the current state-owned asset sales programme, it would probably be ‘compromise’.
In 2008, when the Government was faced with the challenge of tackling rising levels of public debt (projected at 36% of GDP for 2013) in a low-growth economy, all the while nursing a balance sheet heavily overweight on A-rated electricity assets, the choice was clear: sell one to pay the other.
And when hounded by voters’ fears of foreign ownership, again the obvious concession was to partially float the electricity companies, while offering dangling juicy incentives in the form of share bonuses, buy-now-pay-later, and price-cap schemes to secure retail investor participation.
Compromise, as described above, implies the best of both worlds, but unfortunately the reality is that this kind of trade-off never comes easy.
The anti-privatisation camp, rightly or wrongly, have taken glee in pointing out that the Government is selling off assets which generate higher dividend returns than the equivalent interest rate on our public debt.
Critics have also noted retail investors will be paying for these assets twice, since they’re technically owned by all New Zealanders anyway. Plus, those who don’t participate are having part of their national wealth snatched away from them.
Meanwhile, free market advocates aren’t entirely happy either. They’ve pointed out the Government’s majority stake will likely limit the flexibility of these firms because they won’t be able to raise capital through an equity issuance the way fully privatised firms can.
It could be argued the efficiency drag of a single shareholder can already be seen, with Contact Energy and TrustPower (two private companies with diverse shareholder bases) offering the highest returns on equity in the sector.
Returns from the state-owned firms lag behind these two companies by a noticeable margin, even though they’ve been operating as private entities for over a decade.
So, given these compromises, has the hybrid privatisation been worth it?
Frankly, it’s too early to tell, but it’s interesting to consider that there could have been a third option: just giving the shares away (as pointed out by Professor Sinclair Davidson of the Royal Melbourne Institute of Technology).
While the government would give up a dividend stream, that’s traded off against the $10 billion it would inject into the economy at a local level.
It also scratches two other important itches; it instantly creates 4.4 million equity investors, and removes the political temptation to win votes by blow-out spending, knowing you can sell off parts of the balance sheet when the debts come due.
Clearly this choice is off the cards this late in the process, but it would have certainly been interesting to see how it would have shaped the public debate on the issue, particularly with the post factum referendum on the issue approaching.
Jason Krupp is a research fellow at NZ Initiative.