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Asset sales – windfall capital gain for some, higher prices for the rest of us

Written By: - Date published: 5:04 pm, June 14th, 2012 - 33 comments
Categories: Economy, privatisation, Steven Joyce - Tags:

National rushed its Asset Sales Bill back into the House today. Stephen  Joyce argued that its purpose was to reduce debt, deepen capital markets, and invest in schools and hospitals. One-off sales of productive assets don’t reduce debt, they increase it. If our future schools and hospitals depend on flogging off more assets, we won’t get too many more before the assets run out. The real reason for the sale is the middle one. Experience with other utility asset sales is that they produce windfall capital gains to the buyers. Its not so much the dividends the buyers will be after as the capital gains.

If deepening the capital markets is the real reason for the sale, it explains why the National Party would support it. It is of a piece with their billion dollar plus tax cut for the wealthy. That money has to have somewhere to go, and utility assets are attractive not only for their dividends but more importantly because they also generate huge windfall capital gains. There is also the one-off gift of around $200million to brokers, many of them foreign-owned.

Past experience shows that asset sales of energy infrastructure also generate a regressive tax on consumers, who end up paying much higher prices for electricity. This tax is captured by the private owners of the assets, not the government. Private company directors are required by law to demand a fair return on assets for shareholders; as historic assets built years ago are revalued upwards then the required rate of return increases, so prices go up to generate the return.

The effect of this asset revaluation after privatisation was shown by research presented recently to the Fabian Society by Jim Turner, Dick Werry and Peter Harris. They compared what happened to the Wellington region water network and electricity network between 1990 and 2010.

Wellington region’s water distribution network is still in public ownership. The region’s electricity distribution network was privatised in 1990. The two networks cover the same area and both distribute an essential service. In 1990 the asset value of the water network was $168million and the cost of distributing water was $22.2million; the asset value of the electricity netwrk was $180million and the cost of electricity distribution was $36million. In 2010 the water distribution cost rose to $26.1million, a 17.5% increase. Privatised electricity distribution cost $142.5million, a 295% increase.

Why the difference? The answer is in the capital gain, and the required return on appreciated assets.

50% of Capital Power was sold to TransAlta in 1992 for $120million and the other half in 1996 for $90million. In 2000, TransAlta sold to Kansas banking group United Networks for $560million, making a handsome (and tax-free) capital gain. In 2004, United Networks sold to New Zealand company Vector for $800million, another substantial tax-free capital gain. In 2008 Vector sold the network to its current owner, a New Zealand registered subsidiary of Chinese company Cheung Kong Infrastructure Holdings Limited, for $785million.

Treasury expects a $200 million per year gain on disposal of the assets to offset loss of dividends, making (on paper) a gain in net worth of $475 million. This assumes the assets are undervalued in the government’s books and that they realise a better price for them than is recorded. That implies higher power prices are likely, but seems a brave assumption in a declining international economy.

The net effect of all this is that we will all pay higher prices for privatised electricity assets not just for supply reasons but for asset revaluation reasons, driven by the rights of private owners who will also reap the capital gain. They will all likely eventually end up in overseas hands, similar to what happened with Wellington region’s electricity network.

It may be time for Labour to do what New Labour in Britain did in 1997, announce that there would be a capital gains tax on windfall profits generated from the sale of the privatised assets. That policy  generated L5billion back to the British taxpayer.

33 comments on “Asset sales – windfall capital gain for some, higher prices for the rest of us ”

  1. Treetop 1

    How much lower can National go?

  2. Draco T Bastard 2

    It may be time for Labour to do what New Labour in Britain did in 1997, announce that there would be a capital gains tax on windfall profits generated from the sale of the privatised assets.

    Nope, it’s time Labour and the rest of the opposition said that they would renationalise without compensation. Stop any sales before they go ahead.

    • Kotahi Tane Huna 2.1

      +1

      Just as a will can be annulled if a person is deemed to have made it while not of sound mind, the National/United Future/Act/Maori Party government is attacking New Zealand against all advice, good sense, and wishes of the people. Their decisions should be discounted, and dismissed out of hand with contempt, and extreme prejudice in the case of the MP and UF.

      Things to do by lunchtime: the reversal of every piece of legislation passed since Nov 2008. Perhaps with a very short list of exceptions.

      Things to do by tomorrow – the annihilation of all stains left by the National Party on New Zealand. starting with low-life Richardson’s first budget and from there into employment relations law.

      • darkhorse 2.1.1

        Actually ruth r’s legacy was only a pale shadow compared to the damage done by roger douglas and his ilk.

        Labour needs to expunge that blot on its history book David lange let this happen and Roger made it happen. 

        Helen Clark and Michael Cullen allowed the housing bubble to inflate over the past decade and have done more harm to the poverty levels in this country by doing so than any of the tories.

         

    • Jimmy 2.2

      And while they are at it say they will renationalise land owned or invested in by foreign interests. Except this would require renationalisation of ALL land as negative leveraging means that banks partially “own” most of New Zealand.

      The reality is that any such move would have such a negative effect on the economy that it would be political suicide.

      But to hell with that, I say we blow up any dams that aren’t kiwi owned and be damned with the down stream consequences.

      [lprent: If you’re going to reply to a comment – then reply to the damn comment rather than making up your own fairy tales on what you think that they said. Draco stated how he thought that upcoming asset sales by the government should be handled by the opposition – by increasing purchasing risk.

      Investors have to be aware of risk, because that is how they discount price. What Draco suggested was to change the risk level to investors transparently and not retrospectively. That bears no relationship to what you seemed to be saying that he was really saying. Simple minded diversion trolling in my book.

      For your diversion and wasting my time dealing with your idiot diversion trolling and for using communism out of any context in a later comment – banned for a month. After all you should have been aware of the risk of diversion trolling here with moron level comments ]

      • Colonial Viper 2.2.1

        You haven’t thought this through.

        We only need to renationalise specific strategic assets to start with.

        There’s no rush.

        • Jimmy 2.2.1.1

          If we are going down the line of the state taking ownership of private equity why not go the whole hog and become a communism? Because we all know how well that worked out for the people under such regimes.

          Why not claim the assets above and beyond $1 million of anyone who had a total worth more than that? After all who needs that much? Because we all know that would leed to a mass exodus of our “wealth creators”.

          If Labour were to make such a brazen claim it would allow their opponents to tell the public that if they get into government it will send NZ into a depression of unseen proportions. And for once, said opponents would be telling the truth.

          [lprent: Stupid and inappropriate use of ‘communism’. Mindless assertions that seem to assume that investors cannot manage risk. You really are a rather moronic little troll who has absolutely no idea of what you’re talking about. ]

          • Draco T Bastard 2.2.1.1.1

            Because we all know how well that worked out for the people under such regimes.

            You mean the ones that were/are State Capitalist? Yeah, that didn’t work too well. Distributed Capitalism works a little better but it still fails in the long term – that’s what the Great Depression and the GFC are, the failure of Distributed Capitalism.

            Because we all know that would leed to a mass exodus of our “wealth creators”.

            Ah, a person who believes in the Wealth Creators Who Aren’t.

            As you’ve been banned for a month for being really fucken stupid I won’t expect a reply.

          • darkhorse 2.2.1.1.2

            most of our wealth creators abandoned the place long ago and it wasn’t communism that was the problem it was the evil and corrupt people who ran a right wing dictatorship in its guise.

          • Colonial Viper 2.2.1.1.3

            If we are going down the line of the state taking ownership of private equity why not go the whole hog and become a communism?

            When you put a teaspoon of sugar in your coffee do you also empty the sugar bowl in as well?

      • Kotahi Tane Huna 2.2.2

        Nope, I’m not advocating for that, I’m saying that the Labour/Green government-in-waiting should openly, deliberately sabotage the National Party/United Future etc. betrayal of the country. The Quislings are lucky this isn’t an absolute monarchy with me in charge.

        No-one will buy shares that will be confiscated by lunchtime.

        • lprent 2.2.2.1

          No-one will buy shares that will be confiscated by lunchtime.

          Yes they will. However they will discount the price to cover them for what they perceive is the risk. In exactly the same way that they will increase the price for their perception of likely earnings.

          There are few assets at any level of risk that don’t have a price.

          • Kotahi Tane Huna 2.2.2.1.1

            I can’t see the share price getting up high enough to make the sale worthwhile in the first place. The certainty of confiscation means that whoever’s left holding the shares loses everything – you might get two or three years worth of dividends out of them, or be able to make some money shorting the market as the price plummeted as the deadline came around…

            What am I missing?

            If everything we build gets sold by Bill English or one of his replacements, what point is there in building in the first place? Or to put it another way, why not find legislative means to prevent such pillage in the future?

        • Fortran 2.2.2.2

          I have asked my KiwiSaver provider whether they will subscribe to these asset sales and they said yes,like all the others. Tey consider them to be a good long term investment for Kiwisaver members.

    • darkhorse 2.3

      Definitely barking up the right tree here DTB Why not be just plain sensible and say they are coming back into public ownership through compulsory acquisition at the lesser of current market or original sale price.

      We need leaders who don’t mess around.  If government wants it government can do it and a buy back is much less immoral and illegal than the present government’s behaviour – and just saying that the would be compulsorily repurchased would kill the sales process stone cold dead. 

    • BillODrees 2.4

      It is Labour Policy to advise all potentail buyers of ACC business that they should build a forced sale-back into their investment risk assessment.  

      It is inconceivable that Labour does not give that “advice” now.  I’ve no doubt that Clayton Cosgrove  feels that way. That approached will be endorsed at the party conferences. 

    • Pink postman 2.5

      True D.Bastard. Labour must now warn any buyer that as soon as they are
      the Government the first thing they will is return the assets, either buying back (will be hard) or just take it over with nationalisation . The assets belong to the people of Aotearoa this lot of Tories are stealing them. Stolen goods when recovered are returned to owners ,are they not.

  3. jack 3

    Key should have to hand his passport in so he won’t be able to leave New Zealand so he can see the permanent damage he has done. Goldman Sachs executives are having wet dreams.

    • Bored 3.1

      I personally favour a ruinous departure tax for Key of multiple millions of NZ pesos, followed by passport confiscation.

      • marsman 3.1.1

        I would prefer corruption charges that would see Key and English double bunking in prison.

    • Dr Terry 3.2

      jack, you have a point, on the other hand I rather enjoy life better when the creep IS out of the country! Very likely the whole world will see what he has done and see him for what he is. Then we should cancel his passport and not allow him back in! Let him “rest in peace” in the Hawaiian mansion (excuse the sarcasm).

  4. vto 4

    This is a complete and utter scam. There is not a single compelling reason for selling and plenty of compelling reasons to not sell.

    scam scam scam scam scam

    We gotta take the power back!

    And that is what will happen very soon. The world is about to explode, the fuse is lit, and the likes of people like Key will be running scared. The brownshirts will be out and hell will ride the streets.

    • Draco T Bastard 4.1

      The brownshirts will be out and hell will ride the streets.

      Well, we hope not.

      • vto 4.1.1

        Yes that’s right, we certainly hope not. Sometimes the keyboard just marches off on its own …

        But that is the way we are heading. Here is a question – do you think that the bank runs that are currently underway in parts of europe will ease or worsen? And by how much?

        And another one – if that happens, as was a microsecond away from happening in 2008, do you think a government guarantee will be able to stave it off this time?

        One last question – if this happens then what do you think would be the effect, especially in regard to the current middle east machinations, the 50% youth unemployment in various parts of the developed world and the 50% of americans dependent on a government cheque each month?

        It might sound dramatic but it is my genuine opinion that this scenario is on us. Or put it this way, if there has ever been a time of highest risk of such an eventuality in the last 80 years it is right now.

  5. Matthew 7

    I wonder if Treasury’s forecasts include the added costs of running schools and hospitals when power prices go through the roof. Hospitals and schools use an incredible amount of power, as do councils, jails, police stations….. all of these taxpayer or ratepayer funded institutions will see huge increases in power costs over the foreseeable future and more costs dumped on the average kiwi.

  6. Technically speaking, one-off sales of productive assets DO reduce debt, (the overall amount we owe) they just do so at the cost of future deficit (the amount we need to borrow each year) or smaller surpluses.

    I still want to hear what Labour’s policy regarding the assets already sold is, if they’re so against sales, the logical answer would be nationalising those assets again.

    • darkhorse 8.1

      Not quite – the taxpayer and the electricity consumer are one and the same – all it does is allow the government to mine our asset base while increasing the overall cost of being a citizen in this fair country.  It is cheaper for everyone to put taxes up

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