Peter Lyons looks at the rationale behind the Government's recent proposed partial privatisation of state assets and gauges whether they stack up.
The announcement of the proposed partial privatisation of various Government assets appears more ideologically driven than sound economics. It signals a Government bereft of innovative policy ideas to grow the economy.
Unfortunately the Labour Opposition also lacks any coherent vision beyond tax-and-spend redistribution policies.
Prime Minister John Key, mentioned the fear of a credit downgrade several times in justifying the policy proposal. The implication is there is no alternative. If the Government does not sell part of these assets, then it will be forced to borrow further to fund core investments in infrastructure, schools and hospitals.
He also mentioned that New Zealand's debt levels were almost on par with apparent basket cases such as Ireland, Greece, Portugal and Spain. He failed to identify that these countries are suffering from massive Government debt levels whereas our debt levels are primarily in the private sector.
It is worth exploring the various rationale given for this policy initiative to see if they actually do stack up.
The partial sales of the Government-owned power and coal companies as well as Air New Zealand will not make any difference to the Government's overall balance sheet apart from reducing one asset class (SOEs) and increasing another (cash from sales).
However it does mean the Government has lost a large chunk of the future profits generated by these assets.
These profits will now accrue to the new owners, who are meant to be Kiwi mum and dad investors. The credit rating agencies will be well aware of this simple accounting truth.
Mr Key also points out that the partial private ownership of these assets will make them more accountable to market discipline particularly in having to disclose information due to listing on the stock exchange.
This is nonsense for several reasons. These SOEs are already accountable fully to their owner, the Government, which could legislate to require any information that it wished.
The myth of market discipline and enhanced efficiency was one of the main justifications of privatisation from the 1980s. But wasn't Air New Zealand a privately owned company when it had to be bailed out by the Government earlier this decade?
The myth of the superiority of large private-sector firms over SOEs in New Zealand should be laid to rest given such debacles as Feltex, the finance companies and a host of firms listed on our stock exchange in 1987.
No SOEs have required bailouts in the past few decades. The New Zealand State Owned Enterprise model works as efficiently as the private sector to generate returns for New Zealand tax payers.
SOEs are monitored by the Government as the owner. Large public companies are supposedly monitored by their numerous shareholders. Most of these shareholders lack the time, energy and resources to closely monitor their investments. The greater accountability and monitoring argument does not stack up.
The argument has also been made that partial privatisation will allow the SOEs greater access to capital which will allow for expansion. This also does not make sense. The sale of shares in these businesses will raise money for the Government rather than the businesses themselves.
These SOEs probably have easier and cheaper access to funding as a result of being SOEs. They can issue bonds at relatively low rates of interest because of the implicit assumption of Government backing as a result of being Government-owned.
The shares sold in these SOEs will be targeted at New Zealand mum and dad investors and will encourage them to become savers and investors.
This is a noble thought, but largely impractical. There could be no practical restriction on the mum and dad investors on-selling their shares to overseas buyers at a higher price. Any possible restrictions would reduce the sale prices of the SOEs and could be easily avoided.
Many shares will ultimately end up owned by the highest bidders who are likely to be overseas buyers eager for the high returns on offer here.
The high private debt levels in New Zealand mean that many mums and dads are too busy desperately trying to reduce debt to invest in the share market. Overseas ownership will mean that a large chunk of the profits of the power sector which sells an essential product will end up overseas. Keeping ownership in New Zealand is a myth.
This proposal is not a growth or efficiency policy.
In this sense it shares similarities with Labour's proposed tax redistribution policies. The ultimate losers will be the New Zealand taxpayers who are the current owners of these assets.
• Peter Lyons teaches economics at Saint Peters College in Epsom and has authored several economics texts.
