As part of our election season, one of the questions I was asked was why the Government sold down assets to pay off debt. The simple answer is that the asset sales were nothing to do with paying off debt. I actually backed the partial sell down of assets, but not for the reasons that were talked about in the public debate. Lets look at some of the arguments for and against, which stack up and which are red herrings.
Selling assets to pay down debt
Frankly the debate on both sides of the political divide was pretty shallow. National argued about paying down debt and investing the money elsewhere. Labour bemoaned the loss of dividends from the power companies. Frankly this whole transaction should be economically neutral, because the sale price should reflect the profits we expect in the future (any sales sweeteners aside).
In fact new research shows that the government might be able to have its cake and eat it too – reap the revenue from asset sales and still receive higher dividends from the companies. In the end I’d suggest it is a points decision to National: why have our Government money tied up in these assets when it’s the role of the private sector to conduct business? Especially when the private sector and pressure from investors seems to get better results. Unless someone has an objection to private business – do we hear that?
Why sell assets to reduce debt? from Gareth Morgan on Vimeo.
“Strategic Industries”
Then there’s the argument about some assets being “strategic”. Well that term is subject to abuse as well. The most strategic assets for a country are in food production and in New Zealand the government doesn’t own those. So again proponents of this argument have to establish their case, otherwise it becomes little more than ideology.
Generally the government shouldn’t own businesses…
As an economist, my starting point is that government shouldn’t be in business. Sure, there are a few exceptions to this general line (which I will explore below), but I don’t think these assets meet the ‘exceptional’ test. Having looked at the substantive arguments, it’s bracing to examine the rhetoric coming from both sides.
I’m sceptical of government-run businesses. There’s a long and sad history of failures and bail-outs, of management incompetence and self-serving behaviour, and of business strategies that are aimed at political, not economic, objectives. At the extreme, we have the experience of the former Soviet Bloc to look at. But those with a reasonable memory will recall spectacular failures closer to home too – such as the collapse and tax-funded bailout of (then state-owned) BNZ in 1990. Owning a business is risky, as this Government has found out with Solid Energy. Private operators can manage that risk better, and if necessary declare bankruptcy, whereas the government has nowhere to go. Also private businesses firstly have to convince the market that it’s worth investing in them, whereas all a State business needs is a bunch of well-meaning but lightweight politicians to be enthused to invest other people’s money. That is why over the last thirty years most governments around the world have privatised business assets and avoided nationalising them.
… except sometimes
There are situations however where this general rule doesn’t apply. The most common situation is when the business in question is dominant in its market. There is only one thing worse than a government monopoly, and that’s a private one. This is often a business that requires substantial basic infrastructure: our national grid Transpower, Rail carrier KiwiRail (and arguably Telecom in the 90s) are good examples of this. Kiwibank appears to have been set up to crack the cartel-like behaviour from the Big 4 Aussie banks – so again it is a question of market power.
Ideally good quality regulation would ensure competition so most businesses can be privately owned and run. But as we know this is not always possible, and in small economies especially there can be a conflict between the low supply costs that you get from having large businesses operating at an optimal scale, and the benefits consumers get from having more (smaller) players competing in the market.
Do airlines and electricity meet this test?
No. Our national airline operates in a cut throat industry, and there is no evidence of market power being abused in the electricity sector. Electricity prices have risen, but they needed to. They reflect the cost of new generation – the cost of getting that extra kilowatt. So where is the problem with private ownership?
Labour and the Greens love to point out that electricity companies with hydro assets can make big profits because of these past investments. But that is not an abuse of market power. There are players in every industry with more favourable cost structures, and they make more money than their competitors. Labour and the Greens argue that such profits are ‘obscene’ when they are going to firms that aren’t owned by the Government. But so long as a good sales process was followed, the Government should have scooped out the anticipated profit in the sale price of the asset. So it is no big deal, regardless of who buys it.
Rather than argue over private ownership, the focus should be on whether markets are competitive and we are doing all we can to ensure that owners of business aren’t screwing monopoly profits from consumers. That can be the case irrespective of ownership. It is actually really hard to build a case for State ownership – not impossible, but in most cases where there’s market distortion regulation is a better option than ownership. At the least regulation saves the government from having to shell out for big investments.
Finally let’s not forget, the government is pursuing the ‘mixed ownership’ model – the state keeps 51% of the assets in question. So meaningful ownership hasn’t really been given away, the government retains control. Another reason why anyone worried about these companies abusing any market power needn’t lose too much sleep at night.
The real benefit from asset sales
The real benefit for NZ Inc from asset sales was from getting more money into our equity markets. For too long we have put all our eggs in the housing basket; there simply hasn’t been enough money sloshing around in the NZ sharemarket for it to be a viable alternative for investors to invest in or for businesses to raise funds from. The recent sales provided a much-needed boost to this poor cousin of the New Zealand financial system. As I’ve argued before, removing the tax advantages on housing would also be a great step.
So don’t fear for our economic sovereignty or run scared of private ownership. The asset sales debate was a storm in a teacup, it is time we put it behind us and moved on to other things.
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