Exorcising the asset sale bogy
Fri 18 Dec 2009 by Infometrics Ltd in Government

There has been a renewed focus on public asset sales in some western countries as governments reassess the value they get from owning commercial assets when faced with spiralling public debt.  The British Government, for example, has announced it will sell £16bn ($35.8bn) in public assets over the next two years.  Several other European countries such as France and Germany are also undergoing or seriously pondering public asset sales.

The New Zealand Government has a considerable amount of capital tied up in commercial assets on its balance sheet – around $15bn as at 30 June 2009.  Examples of State Owned Enterprises include New Zealand Post, TVNZ, KiwiRail, and the government-owned electricity generators.  Consider what could be achieved for taxpayers if a proportion of that capital was freed for use elsewhere.  For instance, it could be invested in much needed infrastructure such as roads, or it could be invested in schools, hospitals, and other public amenities.  Alternatively, the Government could reduce the burgeoning public debt burden.  This would improve New Zealand’s overall debt position, helping to improve our sovereign credit rating and lowering the cost of financing for all New Zealand businesses.

The fiscal consequences of public asset sales are only a small part of the overall effects.  There is a wealth of evidence to suggest that on average privately owned businesses are run more efficiently, innovate more, and provide better customer services than government owned businesses.  The nub of the reason for this is because private owners are acutely responsible for the financial performance of their companies. Sustained bad performance will result in a private company going out of business.  Government owners of commercial businesses on the other hand don’t have their own "skin in the game" as they say.  In many cases the true objectives of government commercial entities are unclear or conflicting (profitability versus social objectives versus "strategic" objectives) making accountability for results difficult to determine.  Poor performance can be supported by taxpayers indefinitely to their ultimate detriment.

Those against selling public assets often cite loss of economic sovereignty as a reason against such action as the assets often end up in foreigners’ hands.  Foreigners do not always end up controlling sold public assets.  Controlling stakes in Telecom and Air New Zealand remained in New Zealand due to the Kiwi Share provisions, which limited foreign influence in these companies.  Nevertheless, there is a high likelihood that privatised assets will be sold to overseas owners because of the dearth of capital available in New Zealand to support large-scale enterprises.  Regardless of who owns the sold assets, the jobs associated with them remain in New Zealand.  Foreign owners are bound by the same laws and regulations and are required to pay the same tax as New Zealand owners.  Foreign owners are not treated any differently than private domestic owners, nor do they act fundamentally differently.

Some argue that there is the potential for foreign owners to plunder their acquired assets sending booty offshore.  This doesn’t make sense.  If foreign owners pay a market price for assets their aim will be to extract maximum value from them.  They will be shooting themselves in the foot if they destroy value through indiscriminate slash and burn.  If there is more value to be realised from dividing assets up and selling off parts then this suggests that the assets were poorly run in the first place.  Selling parts of operations to other owners who can run them better will improve their competitiveness to the benefit of New Zealand.

Of course foreign owners will repatriate as hare of the profits overseas.  That is the return they get for the risk of investing their capital here.  In return New Zealand gets capital not otherwise available locally, access to overseas technology and skills, best practice management expertise and knowhow from overseas, and often easier access to large markets through foreign owners’ overseas contacts and distribution channels.

Some may not mind a return being earned by private owners if it is generated in competitive markets.  The beef they have is if monopoly profits are generated so that consumers are ripped off delivering inflated returns to owners.  Monopolies are a problem regardless of ownership.  The solution is to effectively regulate them so that they do not exploit their market power.  The current perceived abuses in the New Zealand energy industry, for instance, are perpetrated by government-owned electricity operators in a poorly structured market.  Get the market structure right (challenging admittedly) and most of the problem will be solved.

Sale of public commercial assets needn’t be seen as a bogy.  In reality it would result in no great changes in the distribution of power and wealth in New Zealand and confer long-lasting benefits to taxpayers and consumers.  Sounds like a free lunch.  And it is if sales are an open process and markets are properly regulated.  Sales of public commercial assets will help us wring extra performance out of our economy without the economic upheaval that some fear.

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