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.