Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Both parties overstating benefits of asset policies

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Meridian is one of the four state-owned energy firms lined up for a sell-down. Photo / APN
Meridian is one of the four state-owned energy firms lined up for a sell-down. Photo / APN

National's plans to sell down the Crown's stakes in four state-owned energy companies and Air New Zealand is one of the hot-bottom issues of the campaign.

Both major parties have exaggerated the fiscal benefits of their respective policies by glossing over the opportunity costs involved - dividends foregone in National's case and a higher interest bill in Labour's.

Suppose the Government sells down to 51 per cent in all five companies and achieves $6 billion, the mid-point of the Treasury's indicative range.

Dividend forecasts from the SOE energy companies - Meridian, Genesis, Mighty River and Solid Energy - as consolidated by the Treasury, average $449 million a year over the next five years.

Forty-nine per cent of that is $220 million. Throw in $20 million for 23 per cent of Air New Zealand and and the dividends foregone would average $240 million a year or 4 per cent of the $6 billion sale price.

Compare that with the interest bill a Government would have to pay on the $6 billion it would have to borrow, all else equal, to replace the sales proceeds forgone.

Rather than speculate about what will happen to bond yields over the next five years, let's just take what the Government paid on its debt over the past year, 5 per cent, which would be $300 million a year.

So we are talking about a difference of 1 percentage point between dividend yields and bond yields or $60 million a year.

That is so far within the margin of error for an exercise like this that, in the context of a $70 billion Budget or a $250 billion balance sheet, it is a wash and certainly not the solution to any fiscal problems.

The projected sales proceeds would barely cover one year's capital expenditure by the Government.

That leaves the non-fiscal arguments.

Proponents of selling tend to take it as axiomatic that the private sector is better at running businesses than the state is.

Opponents say that taking that position in New Zealand's case requires a bad case of amnesia about the results of the previous round of privatisations.

Proponents say that it will be different this time: the mixed ownership model, already adopted by Labour in the case of Air New Zealand.

They also argue the disciplines of stock exchange listing will provide more transparency, and institutional investors and equity analysts more scrutiny, than the state-owned enterprises model can provide.

And that the potential of the companies to grow will be stunted if they have to rely on risk-averse, cash-strapped finance ministers to put up additional capital - something they have so far not had to do.

But the Treasury, which might be thought to be predisposed in favour of asset sales, concluded in a paper last December that "there is little evidence to suggest privatisation would significantly improve the financial performance of many of the SOE companies".

In the electricity sector investment in new generation has been sufficient to keep the lights on, it said.

"This investment is funded from the SOEs' own balance sheets, while maintaining dividends, indicating that Crown ownership is not starving these enterprises of capital," it said.

Grumpy consumers have a fair idea where that investment capital has come from - electricity has been a serial offender in the inflation data for years.

The Wolak report commissioned by the Commerce Commission found evidence of the lucrative exercise of market power by some generators in some years.

The Government has subsequently implemented the recommendations of the Layton review intended to boost competition in the sector. But it is too soon to tell if they have done the trick.

Proponents of selling argue it would provide "mums and dads", KiwiSaver funds, iwi and the Cullen Fund with high-quality companies to invest in and provide a shot in the arm to New Zealand's rather puny sharemarket.

In principle deeper and more liquid capital markets should lower the cost of capital for New Zealand companies.

But, as the Treasury noted, sharemarket liquidity is heavily concentrated in the big-cap stocks. Adding a few more of them would not do much for the smaller fry.

Nor would it make the market more diversified and representative of the economy as a whole. On the contrary, it is already somewhat top-heavy in electricity-related stocks - including Contact, Vector, Infratil and Trustpower.

"We think the gains would be modest," the Treasury concluded.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

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