The Dim-Post

January 5, 2012

Least resistance

Filed under: economics,finance — danylmc @ 7:41 am

As the Prime Minister explained last year, there are two good reasons to partially privatise state assets. Firstly, the private sector is better at running businesses than the state, and secondly, our private sector is so rubbish at running businesses, investors desperately need state run companies to invest in. On that note, Adam Bennett at the Herald reports:

State-owned energy companies earmarked for partial sale are generating returns well in excess of the Government’s cost of owning them and outperform most similar private sector companies, says a report released just before Christmas.

Announcing his Government’s plan to proceed with the part-sales a year ago, Prime Minister John Key said the companies would “reap the benefits of sharper commercial disciplines, more transparency and greater external oversight”.

But Ernst & Young’s report shows the three companies have performed well compared to their private sector counterparts.

Over the 10-year period which Ernst & Young examined, Mighty River consistently produced a return on investment better than three-quarters of 27 companies in New Zealand, Australia and the US which were used as a benchmark.

There’s a school of thought that part-selling of these assets is one of those ‘tough decisions’ governments are supposed to make. It’s actually the path of least resistance. Given its fiscal policies and its current situation, National had three options: (1) raise taxes, (2) large spending cuts, (3) sell assets. The third option is the least damaging to Key’s approval ratings in the short to medium term – so even though it’ll be the worst outcome for the country, it’s the best solution for him personally.

I guess there is a fourth option: the government could start buying majority shares in private sector New Zealand companies – since our state owned companies outperform the private sector, the taxpayer would reap the improved dividends. Everybody wins!

36 Comments »

  1. Why do you think it will be the “worst outcome for the country”? Raising taxes or large spending cuts could have major negative impacts on business activity and unemployment.

    Doesn’t it make some sort of sense to part-sell assets that are performing well so they will presumably be popular shares to buy, which will reflect in the sale price? It would make less sense to try and sell poorly performing companies.

    Comment by Pete George — January 5, 2012 @ 7:55 am

  2. The decision to sell needs to be looked at in terms of the use the money will be put to compared to the benefits of retaining ownership. Essentially, National proposes to sell proven successful businesses that produce an above-average return on capital into a deeply unsettled market, in order to get capital to fund basic upgrades of schools and invest in higher-risk speculative ventures like building resevoirs (while still somehow using that money to get into surplus in a couple of year’s time).

    It’s the equivalent of someone who decides to renovate his home/fund the expansion of his home business deciding to sell shares left to him by his grandmother that return 6% per annum instead of borrowing at 5% per annum, simply because he doesn’t like the idea of being a capitalist pig who exploits the working man. Great if you like that sort of thing, but financially stupid.

    Comment by Grassed Up — January 5, 2012 @ 8:32 am

  3. I basically agree with you, although I wonder if some of the good performance of the state owned companies could be because state-owned companies reap some sort of unfair advantage from the fact that their owner also regulates the market. Kind of like being the All Blacks in a test refereed by a New Zealander. Although I suppose if there had been any hint of this Ernst and Young would have highlighted it in their report.

    Comment by Will Truth — January 5, 2012 @ 8:42 am

  4. I’m interested in exploring your contention that “large spending cuts” would be a better “outcome for the country” than partial asset sales. Why do you feel we would benefit from such austerity?

    Comment by Graeme Edgeler — January 5, 2012 @ 8:56 am

  5. Well of course they were doing well. That was largely when the economy was booming and was also the period during which said companies ‘gauged’ NZers to the tune of $4 billion.

    I’d be more interested to see how they performed over the last three years.

    Comment by Adolf Fiinkensein — January 5, 2012 @ 9:18 am

  6. Why do you think it will be the “worst outcome for the country”? Raising taxes or large spending cuts could have major negative impacts on business activity and unemployment.

    Well, let’s see. Your problem is that you’re spending more than you earn and building up debt. Possible solutions are: you find ways to raise how much you earn; you spend less; you sell income-generating assets to postpone having to deal with it. All three courses of action involve significant unpleasantness, but the question of which one is the worst isn’t exactly a brain-teaser.

    Comment by Psycho Milt — January 5, 2012 @ 9:19 am

  7. there’s a fourth option – keep borrowing.

    It doesn’t exactly sound like a good long-term solution, but if it gives you the same liquidity now as selling the assets, and costs less in future interest payments than the foregone dividends from selling the assets, then it’s a better option than selling the assets.

    There are 4 long-term solutions – cut services, cut taxes, raise taxes, or do nothing and wait for the economy to grow and solve the problem. Cutting spending and raising taxes both sound painful, but how painful depends what spending or taxes you’re referring to. The ‘do nothing and wait for the economy to grow and solve the problem’ approach seems a bit risky, in light of peak oil and global economic shakiness. The approach of cutting taxes to solve the problem makes no sense at all, but it’s likely to be popular with both voters and political donors, so that’s probably what they’ll do.

    Comment by The Female Eunuch — January 5, 2012 @ 9:44 am

  8. test

    Comment by kahikatea — January 5, 2012 @ 9:45 am

  9. @5 “Well of course they were doing well. That was largely when the economy was booming and was also the period during which said companies ‘gauged’ NZers to the tune of $4 billion.”

    The ten year period surveyed by Ernst & Young is up to June 2011 so it includes the last 3 years.
    http://www.comu.govt.nz/publications/information-releases/soe-economic-profit-analysis/

    Ernst & Young compared the SOEs to other companies during the same period – some boom times, some not – and they did better than the other companies in the survey during the same time period. Hence the conclusion they have out-performed private sector companies.

    Comment by MeToo — January 5, 2012 @ 9:46 am

  10. “Why do you feel we would benefit from such austerity?”

    I know this was addressed to Danyl, but I think it all depends on what spending gets cut and what assets get sold. I think a little bit of austerity in road building (say cutting back 7 billion $ or so) would be a far better outcome for the country than selling off our power company assets only to find our power prices have doubled in 10 years time.
    It’s all a guessing game really…

    Comment by nommopilot — January 5, 2012 @ 9:47 am

  11. nommopilot: A straight-up $7b cut to spending on roads would cost thousands of jobs no matter how it was spread out. (A switch of the money to other transport spending might be a very good idea, however.)

    At this point all the remaining possible significant spending cuts would lead to significant job losses, so that’s my vote for worst option.

    Comment by bradluen — January 5, 2012 @ 10:16 am

  12. There are risks involved in retaining all of our energy eggs in one traditional energy basket – if any or all of super conductor, solar energy efficiency and energy storage technologies advance rapidly we may see a significant move to micro generation and energy self sufficiency. Part selling to spread risk – and investing more in developing alternatives – could make a lot of sense.

    Comment by Pete George — January 5, 2012 @ 10:48 am

  13. Pete,

    Superconductor storage, along with fusion-based power, have been the next big thing for the last 40 years, and it’s hard to guess which will arrive first, but both are unlikely to be commercial in the next decade or so, at best.

    Besides, NZ’s role is probably minimal, given that one of the shareholders of our superconductor company HTS-110 ( American Superconductors – others are Scott Technology and IRL ) is facing corporate oblivion by trying claim $1.2 Billion in Chinese courts from their main Chinese client – for IP theft. Victory is about the same chances as survival of icecreams in Hades.

    NZ’s relatively high level of hydro-sourced power ( eg Mighty River Power ) results from investment in the 1930s, and that egg-basket seems fairly solid, despite minimal investment over the decades. The recent windmill boom should continue – providing capital and maintenance costs can be controlled by using new technologies.

    Solar power may well become more viable ( but still not be competitive for urban environments ), provided simple and cheap storage ( batteries ) is matched to simplified electrical systems, such as domestic supplies of <50 volts. Widespread adoption still requires new technologies to be economically viable without subsidies.

    The government is promising to use $100 million of the sale proceeds to turn IRL into a high technology shop for NZ businesses, but the last 25 years have shown most NZ businesses are very risk adverse when it comes to introducing high technology, mainly because they are constrained by management and shareholder expectations for annual bonuses. That's the problem to fix, and it's not unique to NZ.

    NZ's best strategy would be to strongly promote sensible energy conservation, including recycling, reduced packaging, appropriate vehicles ( 600 kg car for 1-4 people, not a 1500-2000 kg monster ), improved freight transport, etc. etc. Import high technologyu solutions, as Asia, USA, ( maybe Europe ) will develop and implement solutions first.

    Comment by Bruce Hamilton — January 5, 2012 @ 11:27 am

  14. The Female Eunuch:

    Yeah –
    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10765463

    Comment by MeToo — January 5, 2012 @ 11:39 am

  15. @ bradluen. It would probably cost us less jobs than you think because big motorway investments don’t create many jobs per dollar spent. Looking at a big project like Waterview, for example, a huge proportion of the costs of the project will be machinery and fuel, rather than labour. The government could invest the same money in more labour intensive projects (e.g., smaller transport projects like building a cycleway where labour is a greater proportion of the cost of the project, building more medium density state housing in Auckland, riparian planting along streams on dairy farms etc etc) and create many more jobs per dollar spent.

    Isn’t another option for the government to increase public debt in the short term (accepting that we have relatively low levels of public debt compared to most OECD nations) while taking steps to a) reduce private debt (e.g., introduce a capital gains tax, create a stronger national savings scheme) and b) reduce public debt in the longer term (e.g., either raise the age of eligibility for the pension or restrict accesibility based on income, invest more money in early child care, get serious about obesity prevention, take steps to reduce alcohol consumption and pump more money into treatment for drug addiction, and so on and so on…)

    Comment by Amy — January 5, 2012 @ 11:45 am

  16. Problem with all of the options mentioned is they assume a quick return to consistent growth. Otherwise we blow through the extra cash in a couple of years and we’re back where we started, looking for more assets to hock.

    Comment by bradluen — January 5, 2012 @ 12:11 pm

  17. Amy: In most cases there are better uses for transport funds than motorways. But I don’t think the case based on jobs alone is very strong. Even if you assume there’s a significant difference in the proportion of funds spent on labour, it doesn’t necessarily follow there’ll be a significant overall difference in jobs. Firstly, spending on materials creates jobs in those sectors as well, albeit less directly. Secondly, a big chunk of the job creation is through multiplier effects: the govt makes more spending money available, people spend it, this creates more jobs, the newly employed have more money to spend, and the cycle continues (though it gets weaker).

    There are differences in the jobs created due to how govt money is spent, but they’re small compared to the difference between spending and not spending at all.

    (Libertarian complaints about crowding out the private sector in 3, 2, …)

    Comment by bradluen — January 5, 2012 @ 12:28 pm

  18. “(Libertarian complaints about crowding out the private sector in 3, 2, …)’

    I imagine the libertarian objections would be more fundamental than the rather standard arguments about crowding out that can be used by many varieties of economic thinking

    Comment by Tinakori — January 5, 2012 @ 12:36 pm

  19. “Libertarian complaints”

    Here’s one: how many NZ-Listed-airline-peers does Air New Zealand have? About none I’d say. Therefore, I suspect the comparison with “peers” is, um, apples n oranges? Presumably the adjustment for the risk premium (amongst other “adjustments”) could be argued to take this into account. Without further disclosure, I guess the peers to be foreign airlines that do not have implicit govt guarantees that AirNZ have and that don’t have near-monopoly domestic operations.
    And Airways Corporation’s peers are deemed to be international airport operators. That’s like comparing the fat content of cheese against milk, as Ernst & Young admit. That is, they have no comparable peers.
    Still in the A’s: Animal Control Products’ peers “are only broadly comparable and includes companies manufacturing chemicals and pesticides”.
    Now you’d think Kiwirail would be directly comparable to other rail companies, but many other rail companies in the world (thinking of Europe) aren’t (rail) monopolies that own their own tracks.
    Kordia, no surprises that the company that has no real reason to exist, can’t compete.
    Met Service, a winning performance, no doubt helped by its work overseas.
    Transpower and the “gentailers”: when you are all owned by the same shareholder, are you really thanked/rewarded/incentivised to compete aggressively, especially when you are such a tight rein that you are directed to play pass-the-parcel with “competitors” over your assets? So in effect, the gentailers taken together are a near-monopoly, not common anymore in western economies.
    Conclusion? Who knows, but here’s a “Not Conclusion”: the study does not show that state-run firms will be more profitable than equivalent private firms.

    Comment by Clunking Fist — January 5, 2012 @ 2:47 pm

  20. “State-owned energy companies earmarked for partial sale are generating returns well in excess of the Government’s cost of owning them”
    But that I CAN agree with: the state’s cost-of-capital is so much lower that than of the private sector, due to the coercive power to tax, underpinning govt fundraising.

    Comment by Clunking Fist — January 5, 2012 @ 2:51 pm

  21. The exemplar is Air New Zealand which is 3/4 owned by the goverment.This stops foreigners from gaining control and makes it less attractive for the asset strippers/sell short type investors while still running a monopoly

    Comment by Minto58 — January 5, 2012 @ 5:28 pm

  22. You need to compare within the industry. Did mighty river out perform Contact or Trustpower?

    And mighty river is definitely not the same company as genesis or meridian – it is the pick.

    Comment by swan — January 5, 2012 @ 6:13 pm

  23. Everyone forgets the poor old taxpayer who is FORCED to fund the slack for these so called “assets”….and that they are denied their real asset… which is the control over the spending of their OWN money by themselves on things they really value.Its the old fallacy of “that which is seen..and not seen in economics”…the failure to consider all the alternatives that were not allowed to come into being thanks to the tax theft.

    Comment by James — January 5, 2012 @ 10:25 pm

  24. Lets see these “Assets” compete in an open,competitive market without big daddy state holding their hands and making the rules in their favour….

    “State Assets” is an accurate label…although not as most people think. They are in fact assets to those who comprise the state..they give the politicians an excuse for being. Its “busy work” to keep them occupied and looking important..Its very debatable whether they are really assets to the rest of us poor suckers fleeced for their upkeep.

    Comment by James — January 5, 2012 @ 10:30 pm

  25. “Its very debatable whether they are really assets to the rest of us poor suckers fleeced for their upkeep.”

    You are aware the assets under discussion return a profit to the Government, thus do not cost “the taxpayer” anything in terms of upkeep … and that many of the “poor old taxpayers” who paid for their creation are now dead so that selling them really represents a taking of past people’s money and using it for your present ends? You do? Oh well – carry on, then.

    Comment by Grassed Up — January 6, 2012 @ 7:33 am

  26. @ bradluen. I think that some of the materials we use in really big transport projects (e.g., the tunnel drilling mechanism for Waterview, the big blue thing for the Newmarket viaduct) actually are made overseas and shipped here – so not many labour benefits for NZers except in the assemblage. I think that it would be interesting to see a comparison of big motorway building projects, smaller roading projects, walk & cycle ways and PT projects. For one thing, I suspect that big PT projects generally create more ongoing jobs (people to drive the buses/trains) than big motorway projects. I know they did some studies in the USA of what states spent their stimulus funds on and they found that the states which spent on PT and smaller roading projects got greater economic benefits than those which spent on motorways but, as you say, that could be due to other factors not just job creation.

    Comment by Amy — January 6, 2012 @ 9:40 am

  27. GU…So taking money by force from dead people is ok as time has passed so just get over it then? So by that logic the Maori should just sucK it up and we can put all that TOW nonsense away too?

    And do these “assets” really return a net profit…? MacDoctor doesn’t think so and he isn’t alone.

    http://www.macdoctor.co.nz

    Regardless any return is going to the state…not back to the taxpayer directly so what good is that? Its like stolen goods being returned to and kept by the police instead of the victim getting them

    Comment by James — January 6, 2012 @ 4:30 pm

  28. “GU…So taking money by force from dead people is ok as time has passed so just get over it then?”

    Whatever the rights and wrongs of taxation per se (which is just the price one pays for civilisation – if you don’t like it, form a political party and contest the national elections to win a majority in favour of reversing the policy), there is no basis for you to claim on libertarian grounds any individual right to have “returned to you” assets built up with the tax dollars of previous generations. At most, you can argue that it is economically inefficient to run assets in this way and that this indirectly costs you by way of tax you otherwise wouldn’t have to pay. But that’s the contentious issue under discussion – is it economically better to retain these assets and the wealth they generate, or sell them and somehow deploy the capital in “better” ways (which may reduce your tax burden … or it may all be horribly mismanaged, as in the 80s). Despite our warblings on this site, neither of us really know the answer to that – we’re just deploying ideological burps against each other.

    And “Maori” don’t get any ToW redress – those Iwi or hapu that can show direct wrong done to them by the Crown gain apologies/assets to be held in common and used according to the decision making processes of the Iwi/hapu members. Of course, if you want to advocate a similar collectivist forms of redress for past wrongs done to groups of taxpayers, have at it.

    Comment by Grassed Up — January 6, 2012 @ 6:49 pm

  29. damn…you guys are good alright.

    Comment by pollywog — January 6, 2012 @ 8:33 pm

  30. The existence of taxation,the taking of a persons property under implied threat of force for non compliance renders void any claim that one living in a “civilised” society .

    The true price one pays to have civilization is to respect the individual rights of others to their lives and property and to enjoy them without interruption by force.

    Taxpayers of old may be long dead but this doesn’t justify the state keeping hold of their stolen property…or continuing to steal more property from younger people. A total cessation of new taxation would be fine with me as a bottom line.

    Comment by James — January 6, 2012 @ 9:51 pm

  31. @James:

    Comment by DeepRed — January 6, 2012 @ 11:00 pm

  32. DR….that vid has been passed around as a joke by Libs for awhile now….still funny though.

    Try again.😉

    Comment by James — January 6, 2012 @ 11:21 pm

  33. To clarify it is really an indictment of the chaotic nonsense of anarchism…not actual Libertarianism, which is a very separate thing. Libs do support Government…just small, restricted rights protecting Government.

    Comment by James — January 6, 2012 @ 11:31 pm

  34. “The existence of taxation,the taking of a persons property under implied threat of force for non compliance renders void any claim that one living in a “civilised” society. … A total cessation of new taxation would be fine with me as a bottom line.”

    Sure – like I say, seeing as taxation is such an obvious and unarguable evil, you should form a political movement, adopt a set of proposed policies, appoint spokespeople to promote them, and win the votes necessary to allow their implementation. Should be an easy task, seeing as how unarguable your position is.

    In fact, the Libz increase from 0.05% to 0.07% of the vote from 2008 to 2011 means that you’ll only need another 2,500 electoral cycles to make it!

    “Taxpayers of old may be long dead but this doesn’t justify the state keeping hold of their stolen property…or continuing to steal more property from younger people.”

    It’s not “theft” if people consent to it. And far, far more people accept (even if somewhat grudgingly) that they should be taxed and pay it willingly than think this is theft by coercive force. So you are demanding that, in order to satisfy your quite idiosyncratic political preferences, all of the rest of us should change our view of how society should operate just because you’ve read someone on the web who has read Nozick and come up with a catchy slogan about “tax being theft” because you just know you must have a right to your money … because you just know you must … because that is what the Universe wants … because you just know it does. Which, given that there are less people wanting this outcome than want Social Credit’s agenda implemented in New Zealand, is a little presumptuous.

    Comment by Andrew Geddis — January 7, 2012 @ 8:37 am

  35. n fact, the Libz increase from 0.05% to 0.07% of the vote from 2008 to 2011 means that you’ll only need another 2,500 electoral cycles to make it!

    That’s a 40% increase. At that rate, in ~60 years or so they’ll have a parliamentary majority.

    Comment by Graeme Edgeler — January 7, 2012 @ 10:44 am

  36. Way too much spare time…

    Comment by will — January 7, 2012 @ 12:35 pm


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