Editorial: Private stakes will ensure assets run well

5:30 AM Saturday Jun 23, 2012

The now-imminent passage of legislation permitting the Government to sell shares in four energy companies should end the long debate that at times has seemed to generate as much heat, if not light, than the companies on offer. The enactment should end a debate that should have ended when the Government had the courage to go to the country with an "asset sales" programme, and won.

These are not asset sales in the sense that the public is losing ownership. The companies and their assets will remain state-owned with minority private shareholdings that cannot exceed 49 per cent. That means half their profits - which should increase under sharemarket scrutiny - will be returned to the public accounts.

The Opposition in Parliament made much of those increased profits during the final stages of debate this week, arguing profits could only come from power price rises. But there are four big companies generating electricity in this country and one of them is fully in private ownership. They all have retail arms that compete keenly for customers, as every householder knows.

Competition has not stopped power prices rising steadily, particularly in the unusually chilly weather Auckland has had lately. Prices went up in April and the heating bill for May was hefty. Rising prices reflect rising demand and the capacity to supply it from hydro or thermal stations. Sustained rises invite additional investment.

The asset sales debate has hardly mentioned the real reason economists urge governments to privatise any utility that is not a natural monopoly. The reason is not simply to raise funds to reduce fiscal deficits and public debt, though that is the prospect the Minister of Finance finds most compelling. But his opponents have calculated that his accounts could lose more in future dividends from the power companies than he hopes to gain from their float.

Business sometimes prefers an asset sale to future profits because the money has more value to it now or because it wants a different balance of investments. John Key has favoured this explanation. He has gone as far as to promise that all proceeds of the power company floats will be invested in items of social value such as hospitals and schools. The Budget last month set up an account for that purpose.

But the reason economists in the Treasury urge privatisation of the power companies is that better investment decisions can be expected of private shareholders. People who put their own money into something take more care of it. The public will receive the benefit of private investors' monitoring of the power companies.

Public ownership is probably necessary for a natural monopoly such as the national grid. But the generating of electricity and its sale to consumers were put on a competitive footing in the 1990s. Contact Energy and local retail suppliers were privatised at that time. Partial floats of the remaining three generators will resume an important reform.

Mighty River Power, Meridian, Genesis and Solid Energy will provide the stockmarket with much-needed gilt and residential investors will have the first bite. If most shares are soon owned overseas, so be it. We live on international trade and investment. Resources are owned by those who can generate their best value. That is how a successful economy works.