Editorial: Fund could offer insight on asset sale

$250 million for KiwiRail is the last of three such payments in the railway's recapitalisation. Photo / Mark Mitchell

One of the items of note in the Budget, a Future Investment Fund, will be of continuing interest as the public watches what happens to the proceeds of partial asset sales. Those who expect the proceeds to be reinvested in assets for equal or greater financial returns are going to be disappointed. The fund will first contain $559 million of capital investment already committed. The money is for schools, hospitals, technology research and KiwiRail's "turnaround plan".

The idea that the Government will cash up some of its capital in highly profitable power companies and put it into a financial sump such as the national railway will alarm many. They should note the fund's initial $559 million has not come from asset sales, it is money that would have been spent anyway. Indeed, the $250 million for KiwiRail is just the last of three such payments in the railway's recapitalisation.

But it is an example of what is likely to happen with the money from asset sales. The proceeds will not be put back into profitable enterprise. A government's role is to make investments that no private enterprise can make.

Governments have the sole power of taxation and it would be a waste of the money it can command to invest in commercial activities. There are too many other worthwhile but non-profitable investments the country needs.

That in essence is the reason the power and coal companies and Air New Zealand are going to be partially privatised. It is the reason no Government, National or Labour, is likely to buy back the shares unless the enterprise is on the verge of collapse, like Air New Zealand after the Ansett purchase or, like the railway, proves to be not profitable when it faces its full costs.

When an ailing commercial asset is given public life support it is normally sold again as soon as it is restored to profitability. There has been no protest at the "asset sale" of AMI Insurance now that the Government has relieved it of Christchurch earthquake claims and recovered almost all the cost from AMI's re-insurers.

The Future Investment Fund offers the possibility that we will be able to see all Government investments at a glance and consider whether they really are of value to the economy. The capital account should be as prominent as the current account in public discussion.

Measuring assumed benefits against the cost of a project is one of the most difficult and debated tasks in central and local government. While the returns from a new bridge or broadband network are measurable, the value of some items in the proposed fund will be the subject of endless argument. An upgrade of our High Commission in London, for example, might be classed as capital expenditure but it would be a stretch to call it investment.

The proposed fund should also include the public investment in projects the Government styles as public-private partnerships. They can too easily place all the risk on the public. That is not only a gift to the private partner, it deprives the public of the benefit of a private operator's risk management.

The boundary between unprofitable public investment and social expenses is not always agreed. But the fund should include every item the Government considers to be an investment. The public can debate whether student loans, for example, are really a capital item.

The argument over asset sales needs to be based on a clearer picture of a balanced public investment portfolio, maintaining the institutions and infrastructure that commerce cannot provide. Not all public spending is investment, though its sponsoring politicians like to call it that. This fund could help distinguish the seed from the chaff.