Who Wants Asset Sales?

Those who favour privatisation can be divided into four camps …

Listener: 5 March, 2011.

Keywords: Business & Finance; Governance; Macroeconomics & Money;

Ideologues who hate the Government succeeding and want to scale it back, even if it is costly, as was privatising the Telecom monopoly. They would do the same to the three electricity companies. Given that the Government has just reorganised them and there is an informed (but not unanimous) view that they should be merged into a single business, it would be premature to privatise them. But when has rationality been a concern of the Ideologues?

Greedies who expect the Government to bail them out with cheap assets and fat fees. That is what happened after the 1987 sharemarket crash. The financial sector, reeling from its own incompetence, wanted some assistance. It got it from privatisation, although subsequent events added to the evidence of incompetence. (There were successful sales; my favourite is the National Film Unit, now owned by one of Peter Jackson’s companies, although we have been pouring subsidies into them, too.)

The argument this time is that the private sector has not been able to develop decent capital markets for the Greedies to benefit from the fees. I sympathise with the case for deepening the market (developed below) but it is how you do it; how the Greedies want to do it is not the right way.

Panickers who want to sell to reduce government debt to avoid the international receivers. The Ideologues and the Greedies like this argument – or any argument that leads to privatisation. But debt reductions from this source will not be enough; often they increase private debt. We need other measures, but first we need to admit the country’s finances are in a dire state. I am a cautious panicker. Some assets sales may make sense (like selling part of Solid Energy to a Chinese firm that wants to improve its security of supply). Other sales may increase the incentive to save. But if it’s a matter of selling off good-quality assets because we have screwed up the nation’s balance sheet, let’s tackle the whole problem rather than pretending privatisation will be enough.

Me, yes, me, providing it’s only a minority privatisation and we go about it the right way for the right reasons. First, every business needs a cornerstone owner committed to its future, not the flashy wideboys who flick the firm on from one temporary owner to another, damaging it each time, as happened to NZ Steel, Telecom, the railways, Air New Zealand … Often – but not always – the only available competent cornerstone owner is the Government.

Part of the past decade’s problem was that ordinary individuals (and our sovereign funds, I’ll come to them) had limited opportunities to invest here. Sure, they could put their money into banks but what if you wanted to trade off a higher return for more risk? Sadly, many invested in finance companies run by wideboys and/or, apparently, incompetents. Not only did investors lose their savings, but the savings were wasted on useless investment. Small savers deserve the opportunity to invest in good-quality companies with solid cornerstone shareholders.

Sovereign funds like the Cullen Fund (and ACC, National Provident and Government Super) and local private funds like KiwiSaver find investment opportunities limited here, so they invest offshore. The chance to invest in government-owned enterprises would mean more investing here – for “mum and dad” investors, too, although they may be wealthier than the average New Zealander; no wonder most voters are not interested.

How to do it? First, slowly – small investors are not going to find overnight the billions that are being talked about. And, second, with conditions that prevent the wideboys being interested; for example, if the Ideologues and the Greedies get their way, and a future government sells its holdings so it ceases to be a cornerstone owner, other shareholders must be bought out on the same terms.

What to do with the funds? The immediate need is to reduce government debt, but later we should reinvest them in the businesses or even – Ideologues will be appalled – use them for more public-sector commercial investment. The broadband rollout?