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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.

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Comments and questions

While it may immediately create 4.4M equity investors I'm pretty sure that almost immediately would follow a couple of million monster hangovers as half the population traded in future dividends for immediate oblivion.

It is an interesting thought and comes from the same drawer as handing out everyone a $100 bill.

It you want to understand how that works in practice you could read one of the studies like David Hill's The Gold Rush.

The reality of "making everyone rich" is that no one works until the free gold is gone, and in the meantime rents go through the roof, so does the price of food, and the price of labour to do anything other than pick up free bits of gold.

The Gold Rush was in effect a huge wealth transfer from the old world, who considered the gold had real value, to the new world where in many places there was nothing to eat at all irrespective of how much gold you had; and it certainly got the new world started.

In the end the bakers, the hoteliers and the hookers ended up with their fair share of the (free gold) handout - and a few people and the towns they lived in became immensely wealthy and some have stayed that way.

By way of example of the problems caused by these windfalls is my favourite story in Hill's book - of the ship's captain whose crew has fled to the goldfields and he is trying to raise a crew to get back to England. He is not the only one as there are another 500 captains whose ships also languished at anchor in Port Philip Bay.

The subject captain is in a bar and spies a likely candidate fro crew not doing anything more than having a few drinks. "Would you like to help me sail my ship back to England, he asks?"

The colonial at the bar says, "Which one is it, I'll buy it from you?"

So I doubt the third option would achieve much more today.

The wealth transfer would end up being from the NZ Government to the bakers, the landlords, the hookers etc etc and the few [possibly fund managers] who became immensely wealthy picking the asset up cheaply and putting up the power price for the next 100 years.