Face Down, Assets Up

Face Down, Assets Up

by / 16/07/12

The DEFINITIVE GUIDE TO THE YEAR’S MOST POLARISING ISSUE

National has finally passed the Mixed Ownership Model Bill, the latest step in their march to partially privatise a handful of electricity, coal and Air New Zealand. Asset sales’ controversy has defined recent political debate: there exists a burning passion for the issue, unprecedented in recent time.

The problem is that too much of the discussion has focused on the politics, and not the economics. Emotionally driven rhetoric about economic treason and paranoid reactions to government debt are not a substitute for informed debate. The prime position given to asset sales in our political discourse is unwarranted; asset sales will have far less impact than our representative elite assert.

Debt

Debt has been the weapon with which the asset sales fight has been fought. Both sides have brandished spreadsheets, forcing them upon an ill-prepared media, crowing about the superiority of their numbers. But their time has been wasted  – at least if rigorous discussion was the goal that they were working towards. Trading future dividends for the sale price leaves nobody better off.

The Government will be selling the assets on the stock market. They have some restrictions, but will generally sell to whoever is willing to pay the most. That matters, because if you’re going to make a massive profit from buying shares, then someone else will top your offer. The person who eventually buys them isn’t going to make much more than they would have if they had put their money in the bank. Similarly, while owning power companies is riskier than paying down debt, this is factored into the sale price of the shares.

We need not fear lost dividends, but we may still lose money on the sales. In 2012, privatisation no longer consists of finding the nearest millionaire and sharing a cigar. Selling the companies on the share market involves a plethora of marketers and consultants, ensuring that we don’t do anything illegal and we get top dollar. These costs may run into the hundreds of millions of dollars, making the deal much less palatable.

Selling the companies achieves little in the way of debt reduction—unless being partially sold means that they become more efficient. If that’s the case, then when we sell them, we get both the value that we’d have if we didn’t sell them and a premium sale price from investors expecting that the companies can be made more profitable. More profitable businesses mean more money for us, but it’s unclear whether they will actually perform any better.

Performance

The State Owned Enterprises Act—which, until recently, controlled the power companies that will be sold—is clear as to how they must currently operate. It requires that “the principal objective of every State enterprise shall be to operate as a successful business”. Our power companies were already supposed to care first about profits, but does that happen in practice? And will that change if they are sold?

If you own shares in a company, you get to vote on that company’s directors, and get to decide how the company is run at its general meetings. If you have the majority of shares, you get to decide the majority of directors and get to decide every AGM vote. National plans to hold onto a majority of the shares, so they will still decide how the companies are run. Still, the owners of 49 per cent of a company have some say, and the appointment of independent directors may lift performance by changing cultures and introducing new perspectives. A share float also brings more public scrutiny, with hourly fluctuations in stock prices leading to intense investor attention.

Oddly enough, one of the international guinea pigs of the mixed ownership model has been municipal seaports. There’s been a resulting wealth of econometric evidence that indicates that partial privatisation does improve performance. In New Zealand, our partially privatised port, the Port of Tauranga, is our strongest performer. However, electricity retailers are far removed from a boatyard. While privatisation allows those who would run a company best ending up owning it, (as they value it more than anybody else) partial privatisation is a weak compromise. The benefits—if they exist—are marginal and uninspiring.

Power prices

Changing power companies is a big hassle—we often have long-term contracts with expensive cancellation fees, and phone conversations as to the respective benefits of the ‘Household Economy’ and ‘Household Economy Plus’ packages make for a dry evening. The Commerce Commission agree that power companies have a lot of power over prices; if Meridian were to raise electricity prices a little, most people wouldn’t switch companies. This is a problem, because it gives the companies too much control over prices, and unnecessarily expensive electricity is bad for anybody that uses electricity—that is, everybody.

Will this problem get worse if the power companies are privatised? Again, this depends on company culture, and we can’t expect dramatic changes. Perhaps a (slightly) different group of directors might be more willing to raise prices, or a (marginally) more aggressive culture would result from the increased scrutiny. Perhaps, too, this behaviour might slip under the radar of our aforementioned regulator, the Commerce Commission. Maybe we will see higher prices, but it does seem unlikely. Relatedly, there’s also some suggestion that the Government will regulate privatised companies more heavily, because they’re not risking their own profits. Given that, it’s hard to understand the alarm over power prices.

One way that power might become more expensive is that private companies could demand higher returns on capital; Contact Energy CEO Dennis Barnes has said that prices need to rise for private investors to make a profit. If this is the case, we need not be alarmed. If the Government is currently subsidising electricity companies by letting them not make normal profits, they are wasting resources; a more efficient use would be requiring normal levels of dividends, and using that extra money to support the poor or provide other infrastructure.

Conclusion

Privatisation has a controversial history in New Zealand—a generation’s political identity has been predicated on this issue. Since the end of the Bolger days, our political psyche has been gearing up for the next asset sales battle. We should have spent our time more wisely; we have much more important battles to fight.

In this column we couldn’t have addressed all the issues raised: such a dry topic incentivises every half-page provincial columnist to introduce some new argument or concern. Ultimately though, every argument must be met with skepticism. The move from a corporatised Government-owned model, to a corporatised mainly-Government-owned model, will change little. Markets will reflect the shares’ value, and, where we have genuine concerns, old-fashioned regulation will suffice to remedy them. The proposal’s value should be assessed at the margins: the marginal change in performance, the marginal transaction costs. That indicates the pointlessness of the entire debate. We discussed the transaction costs of a stock market listing earlier, but the broader transaction costs—the wasted hours debating, the endless media reports (as well as days writing articles for student magazines)—represent the biggest cost of this proposal. In a world with so many issues, there has to be a more pressing concern than the governance of our electricity sector. Partial privatisation is a battle we never should have fought. ▲

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