David Farrar

The week in politics with centre-right blogger David Farrar

David Farrar: Asset sales - what's the political cost?

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Share sales in Air New Zealand are part of the 'family silver' sell-off. Photo / Supplied
Share sales in Air New Zealand are part of the 'family silver' sell-off. Photo / Supplied

Some people label government asset sales as "selling the family silver". It has implications of a household so devoid of assets, that they have to start selling off the Georgian silver.

Ironically the phrase was first used not be a left-wing activist, but by former British conservative Prime Minister Harold MacMillian, in reference to Margaret Thatcher's privatisation policies.

In the New Zealand context, what strikes me is how small the proposed share sales will be. Over five years, $5 billion to $7 billion of shares will be sold in four energy state owned enterprises, and Air New Zealand.

However during that same period the Government will purchase, acquire or build a massive $78 billion of new assets. So the household looks to be in no danger of running out of assets.

With $220 billion of existing assets, the proposed sales by National represent around 2% of the Government's total assets.

It's hardly a closing down sale.

Having established how modest the proposed share sales are, the question some may ask is why bother? Is it worth the political cost?

For most of the last 20 years, polls have shown most New Zealanders do not like asset sales. Today's polls also show a plurality or majority are against the Government's plans. So why would a Government that has generally shied away from unpopular decisions, persist with this one?

I think there are two parts to answering that question. The first is the popularity issue and the second is the economic issue.

Any policy of asset sales (or partial sales) is unlikely to ever have a majority of New Zealanders they think it is a great idea. For many years even a mention of asset sales was deemed politically fatal. Off memory not even a Don Brash led National Party in 2005 campaigned on asset sales, beyond the possibility of Landcorp selling a few farms.

However over time I believe the intensity of opinion on this issue has declined. And it is the intensity of opinion that is more important, than the opinion itself. Put more simply, it doesn't matter so much if people disagree with a party on a particular policy - what matters is whether they feel so strongly on that issue, that they would change their vote.

The nuclear legislation issue is a great example of that. It did not matter so much whether or not support for the law was at 40 per cent, 50 per cent or 60 per cent. What mattered is that for around 10 per cent of the population, that one issue would decide their vote.

I believe two factors have reduced the intensity of feeling on the issue of asset sales. The first is the fact they are very different to the asset sales done so enthusiastically by Roger Douglas and Phil Goff in the 1980s and Ruth Richardson in the 1990s. Those sales were for 100 per cent of the asset, often went direct to a private buyer with no opportunity for "Mum and Dad" investors, and the private buyers were often foreign.

National's policy of retaining 51 per cent in state control, floating them on the stock exchange rather doing a trade sale, giving New Zealand institutions first preference for purchases, and now inserting a maximum 10 per cent cap on any private shareholding reduce the fear factor around the share sales.

It is literally impossible for a foreign company to take control. In fact it will be impossible for a foreign company to have a share-holding in excess of 10 per cent.

Another factor around the favourability is the economic climate we are in. New Zealanders are watching countries in Europe get bailed out to their excessive government debt. They saw the United States come within a day of defaulting on its debt. When the share sales in SOEs are linked to reducing the new for the Government to borrow so much, again the opposition is muted. It doesn't mean they become supporters of the policy, but it does mean they understand the rationale for it better.

Turning to the economic issues, there are a mixture of reasons why National is risking some of its popularity for this issue. The strongest reason is probably a genuine belief that a company which is not 100 per cent Government owned will perform better over time. Not every private company is better performing than every public company. But overall, the evidence is that private ownership does lead to better performing companies. This is of course a key difference in ideology between the left and the right.

A strong secondary reason is the desire to give New Zealanders some more reliable investment options than finance companies. Many investors are very nervous about how to get the right mixture or risk and return. Company shares such as Meridian Energy will be highly sought after I suspect.

A tertiary factor or reason is lowering the amount the Government will need to borrow. The total amount reduced is not huge, but it does send a signal to rating agencies that the Government is serious about keeping gross debt from exceeding a certain level. The unfortunate reality is that if the ratings agencies downgrade the Government's rating, then the cost of the Government's debt will go up, meaning less money available for health, education and science. It will also mean that probably every Kiwi business will have to pay more on their debts. That would be a real lose-lose.

* David Farrar is a centre-right blogger and affiliated with the National Party. A disclosure statement on his political views can be found here.

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