Asset sales as tax by stealth
We already own the SOEs. Our tax money paid for them. So how can we ‘kiwi mums and dads’ ‘invest’ by buying something we already own? What Key is really telling you and me is: ‘you’ll have to stump up with cash to retain your ownership of these assets’. Isn’t that basically just a poll tax? You and I gain nothing if we buy a proportional share of the SOEs when they’re sold – all we’re doing to giving the government money to keep what was already ours.
The reality for most of us, though, is we won’t be able to afford to buy the shares in our own assets if they are sold. So we’ll end up with nothing and be tasked with paying through out taxes what was once paid for by those assets’ dividends to the Crown, while some overseas investor pockets the profits.
Selling assets to pay for motorways
Key does a little rhetorical slight of hand when he lumps in SOEs with other public assets like motorways and schools. The purpose of the State owning commercial assets has always been to prevent private monopolies and ensure the provision of vital commercial infrastructure at fair prices. The other assets are part of the government doing its job in providing healthcare, education etc. When Key says ‘we’ll sell part of some assets to buy more assets’ he is mixing the two. He is selling down the commercial assets to pay for building social assets that have always previously been funded out of normal government capital investment.
Selling assets is selling future profits
Private investors don’t want to buy our assets for kicks. They want the profit stream. Any purchaser must think that the present value of the future profits they will extract from owning the asset will exceed the price they’re paying to buy it. That means we’re giving up the profit stream in return for something that the buyer thinks is worth less. Doesn’t sound too bloody smart – unless we think the government is a more savvy player than private investors and will get over the odds prices but you just have to look at history to know that isn’t the case. Last time, assets were inevitably sold off too cheaply and the profits lost overseas have been massive.
All asset sales give you is some cash up front. In the long-run, they don’t reduce debt, they increase it.
Selling assets is like borrowing but with a higher interest rate
Imagine the Crown’s balance sheet. All up (not just financial instruments) it has $225 billion in assets and $132 billion in liabilities for a net worth of $92.5 billion. Conceptually, there’s nothing different from reducing the value of the assets by selling them then there is in upping the liabilities by borrowing – they both impact on the Crown’s net worth exactly the same: cash goes up, net worth excluding cash goes down.
So, selling assets is like borrowing. Except the ‘rate of return’ that applies to asset sales is higher. If the governments sells to private investors they need to make a profit from the asset that meets their cost of capital. If the government borrows it does so at its sovereign rate – which is much lower than a private investor’s cost of capital.
Again, this is another reason why you don’t sell assets unless it is absolutely necessary. And it isn’t necessary when the government insists it can still afford the billions in tax cuts that have been passed in the last three years.
The most profitable assets will be sold
The Nats have made a big argument over SOEs not being very profitable. As a group, that is true. But with good reason: many of the SOEs are specifically tasked with providing essential services like electricity at a reasonable price. Which assets are the private investors going to want to buy? The most profitable ones and the ones with the most potential to increase their rate of return by hiking prices. That just leaves us with fewer profits flowing into the coffers and higher prices for essential services.
There is no evidence that suggests selling our assets will somehow make them more efficient so that the private investor can take larger profits without upping prices for us. In fact, ‘efficiency gains’ usually turn out to be asset-stripping, which leads to a government bailout in the future.
Private investors in major infrastructure know that their investment is too big to fail, that the government will be forced to step in with taxpayer cash if things go wrong. That creates a moral hazard. Investors have an incentive to extract as much profit as possible by taking large dividends rather than re-investing and to undertake risky investments in the hope of big gains, always knowing that the taxpayer will pick up the bill if things go wrong. Don’t think for a moment that the government retaining some ownership of the companies will prevent this happening.
We know asset sales suck. We tried them before. They sucked then and they suck now.