Editorial: Sales good bet for investors, enterprises

Bill English. Photo / Mark Mitchell

The Budget the Government will deliver today will look forward to the first of its partial asset sales, or as the Government will call it, "the mixed ownership model". The obscure word "model" is probably important. It is an admission that privatisation is an application of economic theory and not an accountancy exercise.

Opposition parties have gone to a great deal of effort this week to show that the Government stands to lose more in dividends than it might gain in measurable financial terms. They may be right. The Green Party commissioned economic consultants Berl, who duly found the sales programme would leave the public accounts looking worse in terms such as debt, net worth and total assets.

Berl's chief economist, Dr Ganesh Nana, concluded the effect of asset sales on the wider economy would be even worse because the dividends lost to the state would quite likely go to foreign shareholders, adding to the country's external deficit and its national debt.

It is a depressing analysis that the Government will probably weather rather than try to counter, though its stated reasons for floating shares in energy companies and its airline have not claimed those financial gains. The expected benefits, set out in last year's Budget, were: "to change the Government's asset mix, free up Crown capital, open up new investment opportunities, provide the companies involved with wider access to capital and impose greater transparency and commercial discipline on them."

Only two of those five reasons - new investment opportunities and the companies' wider access to capital - may be generally understood. Initial public offerings of shares in Mighty River Power, followed by Meridian Energy, Genesis, Solid Energy and Air New Zealand are expected to add 10 per cent to the capital on the stock exchange and attract small investors as well as KiwiSaver and other domestic fund managers. The companies will not rely on the state for new capital.

Two other benefits - changing the Crown's asset mix and the way it employs its capital - may be more easily understood if it is remembered the Crown is not a company. It has obligations for social services and infrastructure that commerce cannot provide. If it can release capital from its commercial enterprises it need not borrow so much for hospitals and universities.

But the last stated purpose - transparency and commercial discipline - is the most important, most difficult to explain and most easily rejected as theory or "ideology". Corporate managers know it is no such thing. A company's share price is a highly visible daily check on its performance, real or perceived, by those who have money at stake. The pressure produces greater efforts and care at all levels of the company. Strong economies are built on competition and commercial efficiency, not public sector comforts.

Berl's report does not dispute these wider benefits of asset sales, it simply suggests there are other ways of achieving them. The pool of investment could be widened by an issue of bonds, state enterprise could raise new capital in the form of debt, sharemarket scrutiny could be imitated by the appointment of independent directors or boards answerable to Parliament.

But why issue bonds or debt if equity can be raised? Why make state companies imitate the private sector if they are in a position to join it? Or partly join it in the "mixed ownership model". Mixed ownership offers the public owner the greater share of the profits expected by more active shareholders. It offers savers and investors new blue chip stock and will probably give our energy sector a new head of steam.