I’ll Take the Cash…
The latest round in the arguments against partial sales of assets is the treasury report from Ernst and Young which apparently says that these assets are performing well when compared to similar assets in the private sector. I confess to viewing that piece of information a little dubiously when the same annual Crown monitoring report (PDF found here) says that Mighty River Power (said to be the first company on the block) lost 20,000 customers in the 2010/11 fiscal year. That does not sound like a great performance to me. Plenty of room for improvement, I would have thought.
Still, be that as it may, in my simplistic economic world, I tend to look only at the cash figures involved. To me, those are the only figures that truly matter and there are only two of them. The first is the amount of actual cash paid to the government in the fiscal year – not the capital gains or retained earnings – just the cash. That figure is $95 million. 49% of that is $46.5 million. That is how much money the government loses each year by selling MRP.
The second figure is how much it would cost to keep. The independent valuation for MRP is $3,631 million. 49% of that is $1,779 million. Assuming the government could borrow at a mere 5% (English was borrowing extra last year because he could get a rate a little over 5%, so this is conservative), the interest on borrowing this amount is $89 million. This figure is bigger than 46.5 million, so it is worth selling Mighty River Power.
This is very “rough and ready”, of course. The government may get more or less money for its 49% shareholding. The actual loss of income from the sale is less because this money will now be going to others as taxable income and therefore some of it will return to government coffers as income tax. Actual cash from shares may be more or less than this depending on how Mighty River does with more private input.
All of this financial consideration is probably irrelevant anyway. National want to sell down these assets because they (correctly in my opinion) see no reason why a government should be dabbling in electricity generation. Labour hate the sales because they think government should be the be-all-and-end-all of everything. They like to call these assets “strategic”. This is code for “we don’t trust the market”.
You could call Ports of Auckland a strategic asset for Auckland. Look what the (local) government has achieved with that. I suspect their inability to stand up to a strong union will cost rate-payers dearly. Does anyone think for a moment that Labour would not find itself in a similar position eventually with State Owned Enterprises?
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Jan 5 12 8:52 pm
There are certain things we need for society to function; housing, energy, health services, transport, water, waste disposal. Either we “trust the market”, or we don’t. If we do, why not sell all assets? If National see no need for a government to dabble in electricity generation, then why retain a controlling interest? And if we are to trust the market, then why not sell all hospitals, water reticulation systems, waste disposal services and the like? Think of the saving in both local and national government subsidies, and we could all just pay for these services as we need them. Or could we? I think we can all understand what would happen if the only driving force was the profit motive.
Jan 5 12 10:36 pm
Yes… things would work a hell of a lot better,prices would be a hell of a lot lower and people would take far more responsibility than they do now for their own actions and to deliver great service. To “trust the market” is to trust we the people….what does it say when it appears our society leans towards the opposite view and wants nanny state in charge?
Jan 6 12 11:11 am
This outlook is a fallacy. Say electricity generation was totally controlled by free enterprise, with no government interference whatever. It would be quite easy for power companies, in the wake of a disaster such as the Christchurch earthquakes, to decide that the cost of expenditure to get the infrastructure up and running again was too great to be economically viable. Easier to leave people without power and wait and see for months/years before deciding on a course of action. We are already seeing this kind of attitude from insurance companies, greatly inhibiting rebuilding and house sales, etc.
Jan 6 12 6:02 pm
Only libertarians would allow an unbridled free market so your proposition is rather hypothetical. But why would you suppose that a private enterprise would not insure their assets? And why would you suppose that the same private enterprise would be happy to lose millions of dollars worth of business a day while it waits for Christchurch to pan out? Methinks your scenario is absurd, Rod.
Jan 6 12 7:19 pm
They would almost certainly insure their assets, but need to spend their own capital in the first instance to get up and running. If a company is answerable only to its shareholders, is operating profitably throughout the country, and suddenly needs to expend a large percentage of its reserves to restore service in one relatively small geographic area, wouldn’t it be prudent on behalf of those shareholders to keep the profits rolling in and not expend money where it may well be a bad investment? Insurance companies are already doing this in Christchurch – declining renewals and new business until they see how it pans out. That’s why the Government is considering itself the insurer of last resort there if all else fails.
Jan 6 12 7:17 pm
nonsense
and i think you totally misunderstand what an insurance company does. It is not a pot of money to be sucked dry by claimants with spurious claims as is all too often the case after a disaster.
An insurance company has a duty of care to ensure only valid claims are met.
Bear in mind that an overriding principle in insurance is the concept of utmost good faith, ie the policy holder must disclose all relevant factors
adamsmith1922´s last [type] ..Adam’s Little List
Jan 5 12 10:58 pm
Actually, government could comfortably sell devolve everything except enforcement (including defense) onto the market. As the primary lawmaker, it needs to retain those in order to maintain proper authority and control over the market. Nothing else matters because, as long as the government has regulatory authority and the teeth to back it up, the profit motive (by which you probably mean unbridled greed, rather than the proper economic meaning) can be constrained to fit with societies desires. There is no need for ownership at all
Jan 6 12 7:36 am
So if, say, all subsidies for doctor’s visits were canned as from tomorrow, your practice could continue to provide services at prices your patients could comfortably afford?
Jan 6 12 6:08 pm
Sure. Loss of government subsidy would put about $28 on every bill. I would imagine that would be reasonably affordable to most as many people access our practice casually and pay that price anyway. There are much better ways of helping the poor access health care, including subsidized health insurance, targeted subsidies and health vouchers.
Jan 5 12 10:02 pm
National want to sell down these assets because they (correctly in my opinion) see no reason why a government should be dabbling in electricity generation.
I agree with you that this is the reason why National wants to sell these assets. However, they lacked the honesty to present this view to the electorate, for the good reason (from their utterly cynical and self-interested point of view) that the voters mostly don’t share it and don’t like it. Being politicians, they’re lying weasels by nature so the fact they’re lying about this doesn’t come as a great surprise – however, it certainly doesn’t fill me with enthusiasm for the project. If they want to pursue some ideological point at our expense, let them at least have the guts to say so.
Jan 5 12 11:05 pm
I suspect National would be happy enough to use this ideological argument if Labour was willing to discuss their retention of assets in similar ideological terms. Instead, of course, the Left talk about “foreign ownership”, “sustainability”, “inequality” and “making John Key’s mates rich”. They waffle on about how much money they are getting from ownership without seeming to realise that the cost of that ownership came directly from taxpayers pockets – taxpayers who now cannot invest because the government has their money.
Jan 6 12 10:36 am
There isn’t really an ideological basis for “FFS, leave well enough alone.” I guess there could be an ideological basis for the view that assets built up by previous generations for the benefit of future generations aren’t for the current govt to sell just because it would like to get its hands on the cash, but that ideology would play a lot better with the voters than the govt’s one.
Jan 6 12 6:13 pm
So, your ideology would be “leave it as a legacy”? I have some sympathy for that view. Unfortunately, the only legacy the power generators seem to have left so far is a decade of excessive prices to the tune of about $4 billion.
Jan 5 12 11:10 pm
“Power corrupts, absolute power corrupts absolutely”
The idea of private ownership is the dilution of power. Central Government should stick to its core responsibilities which is security of its citizens, ensuring a fair resolution of conflicts of interest between them and the development of the Nation in an orderly manner
Local Government should be about the infrastructure that makes our cities and towns work
That said this not an issue that was central to how I vote
Jan 5 12 11:25 pm
The E & Y report compared their performance over ten years.
The last three years performance might tell different story.
Remember how they gouged $4.5 billion while Labour was in power? There’d be something wrong if they had not been doing extremely well.
Jan 6 12 7:11 pm
hear, Hear
As an auckland ratepayer i am extremely andry as I see the Auckland mayor and Council standby and watch the value of the POAL diminish daily.
Their failure to support the Board of POAL is an absolute disgrace.
The inability of MUNZ to clearly articulate the problem is appallling.
POAL appear to be offering a group of workers 10% increase, 20 % bonus and very, very generous benefits when the CEO has confessed he cannnot get the inmates of the asylum to work more than 26 hours of the 40 they are paid for,
Parsloe of MUNZ says it is not about $ but rostering etc.
This is crap, it is about a union, knowing there is a left council with 100% control being weak and prepared to buckle to a group of union dinosaurs.
Sack the lot and hire new workers, at the reported rates there would be queues a mile long
Jan 7 12 11:12 am
There are issues here between a union and the employer. I does not matter whether the employer is from the public or private sector; these are basic employer/employee issues which have been going on since time immemorial. I just cannot see private ownership being so much better than public, both have their strengths and weaknesses. If private ownership is so great, why are many small private companies so difficult to deal with (plumbers, electricians, etc.) According to the postings of some, they should be giving great service, on time, every time. The truth is a bit different.