Opinion: Asset Sales

MRP

by Sam Franklin, Treasurer of the Northern Young Nats

With the partial sell down of State Owned Enterprises well underway, the Labour-led debate over the costs and benefits still rages. The opposition has declared that the National Government is, among other things, “selling young New Zealanders down the river.” This rhetoric suggests that Labour and the Greens are either being deliberately misleading, or are so blinded by political ideology that they are incapable of unbiased economic judgment. Instead of adding to the debate, it may be useful to take a look at the facts of the situation, from the perspective of “young New Zealanders.”

The big selling point of the anti asset-sales brigade is that New Zealand is “selling the family silver overseas.” That sounds bad. Fortunately, it is also completely untrue. The government is selling 49% of each State Owned Enterprise that is listed. The government still owns 51% of each company, which is known as a controlling stake. Even if a single buyer bought the entire other 49% of each SOE, realistically there are very few actions they could take. They could not take the companies overseas or force them to raise prices (the most common suggestion). What listing 49% of these companies does do instead is open them to the scrutiny of the market. If these assets really are the family silver, obviously it would be important for the future that they were well taken care of. Currently, SOEs are a cushy place to parachute retiring ministers of the government in power. Opening them to the examination of the market brings transparency and accountability to the companies. In effect, we still own the assets, but now we are able to actually have a say in their direction and stewardship if we want.

Further to that, it is often claimed that the government is foregoing significant future income streams in the partial sales. Ignoring the above fact that the government is giving up less than half of the future dividend streams, this statement makes some pretty big assumptions. The biggest one, of course, is that these businesses will continue to produce dividends indefinitely. Given the current situation with Solid Energy, and the Labour/Greens “New Zealand Power” scheme, this is closer to wishful thinking than a foregone conclusion. These companies cannot continue to exist indefinitely while they are continuously subject to the whims of the government. The process of listing the companies, instead of decreasing the government’s future dividend stream, will likely have the opposite effect as management becomes more efficient and appointments are no longer made based on which government is in power.

Economically, the partial sales make even more sense, in particular from the perspective of the younger generation. To begin with, currently a lot of investment in New Zealand, and in particular in Auckland, is in property, an unproductive asset. Overinvestment in property explains many of New Zealand’s economic quirks. New Zealanders currently spend 140% of their earnings, mainly due to the fact they are overlevered on mortgages. Housing unaffordability in Auckland is due to rampant overinvestment in the property market, predominantly from local buyers. New Zealanders do not have a viable alternative for investment. New Zealand has one of the least developed share markets of all developed countries in the world, even accounting for our size. There is not enough scale or liquidity to attract interest from businesses looking to grow. It is vital for New Zealand’s continued economic development that businesses can realistically weigh up using capital markets to raise cash. By listing the SOEs, the government is adding depth and liquidity to the capital markets, and taking genuine steps to fix some of the few economic problems New Zealand has.

In return for this, the government is receiving approximately five and a half billion dollars, after accounting for economically hazardous policy announcements from the opposition. This money is going in to the future investment fund, which is being used to, among other things, improve education, healthcare, and scientific research, and help pay for the Christchurch rebuild. This money would literally not exist in any other circumstances. If the government were not undertaking the partial asset sales program, this money would have to be borrowed (from overseas). That would mean that, in the future, young New Zealanders that the opposition is so worried about would be the ones paying it back. This seems to be a reality that is not recognized by many opponents of the program. Of course they suggest that the top tax rate should be raised to increase government revenue, ignoring the fact that research by the New Zealand Treasury Department tells a different story. When the top tax rate increased to 39% from 33% in 2001, tax earnings for the government actually fell.

In the end, concern for the future of New Zealand should always trump political ideology. The importance of this policy for our generation cannot be overstated. The alternatives are to borrow billions more from overseas, or just invest five or six billion dollars less in education, health, and Christchurch. For anyone concerned with the future of this country, they are no alternatives at all.