More on partial privatisation

By Paul Walker 29/10/2012

From Homepaddock comes this interchange from Parliament’s questions and answers time for October-24.

Michael Woodhouse: Why is it important that the share offer programme goes ahead?

Rt Hon JOHN KEY: It is important, firstly, because the Government can use the proceeds of the share offer to invest in new public infrastructure without having to borrow so much to do so. This is exactly the same situation as in 2005 when the previous Government took $600 million from the sale of publicly owned asset Southern Hydro and used it to invest in roads. The share offer also gives New Zealand savers the opportunity to invest either directly or indirectly in big New Zealand companies, and being publicly listed will be good for the companies themselves.

I do believe bringing these companies to the market through the mixed-ownership model is a good, sound economic approach, and actually I think it will deliver a better result for New Zealand without having to borrow more money. . .

I have noted a number of times that I don’t agree with the argeement used here by the PM. In the past I have said

First, selling only 49% of the shares in the companies is unlikely to make an difference to the way the SOEs are run. In particular the sell off will not make the firms anymore efficient since the government will still be the controlling shareholder.

Second, if the government really does want to maximise the income it gets from the sales selling 49% is not a good idea. 51% is worth a lot more than 49%, that is people will pay a premium for control.

Third, selling to “Mums and Dads” will do nothing for the amount of money raised, since Mums and Dads will need a discount to make them buy shares.

Fourth, selling to “Mums and Dads” will do nothing for the efficiency effect of having private owners, since there will be too many “Mums and Dads” for them to be able to coordinate their effects to effect the firm’s behaviour.

Fifth, given that each “Mum or Dad” will own only a very small share of any of the firms, they have little incentive to become informed on the firm’s activities since they will only capture a very small amount of any improvement in performance they could bring about. This is another reason why performance is unlikely to change.

Sixth, the discipline of bankruptcy or takeover is not greater since the government is still the controlling shareholder and is unlikely to let either of these options happen.

If the government is really worried about the proceeds of the sale of share it should take note of points 2 and 3 above. Points 1, 4 5 and 6 are relevant for the effects of the sale on the “companies themselves”. And why do we care about giving

“New Zealand savers the opportunity to invest either directly or indirectly in big New Zealand companies”.

Where New Zealanders invest is surely up to them and not something the government should be interfering with.

Less government borrowing is good but if the government sold 100% of the SOEs even less borrowing would be needed. And you would get better outcomes for the firms.

0 Responses to “More on partial privatisation”

  • Yeah well we all know how Alan Gibbs made a lot of money with the privatisation of Telecom (he now is the proud owner of the largest Tesla coil in the southern hemisphere).
    Unfortunately the profiteers don’t give a hoot about the populace and tend to put the electricity prises up in winter, which hits the most vulnerable hard. But don’t take my word for it listen to Chunky Mark with his social commentary from the UK.

    • If you’re looking for reasons for NZ’s high power prices, the electricity market and privatisation are hardly places to start laying blame.

  • “high power prices, the electricity market and privatisation are hardly places to start laying blame”
    I am sorry but have you not heard of cause and effect ?
    I mean really come on..
    That seems to be a blatant mistruth, are those rose coloured glasses you are wearing?
    Any intelligent person can tell you that New Zealand produces more than enough electricity for the populace, the smelter in Bluff uses a lot and they have been given cheap electricity as part of their contract and that is why they are here, providing jobs.
    The point I was making is that privatisation leads to profiteering at the expense of the consumer as Mark points out in his video. Like we have seen with other privatisation models.
    Any attempt to prove otherwise is lies.
    Got money to invest have you ?

    • Your model requires that the generation companies collude with each other to rig the bids on the auction markets for power supply, or collusion among the electricity retailers to keep prices to consumers up. Do you have any evidence for this? Note that many of these companies remain SOEs – we are only now starting to discuss partial privatisation of some of the generation companies.

  • It is not a model it is called reality, the price of milk, the price of real estate, the price of fish, the price of gasoline. It is called supply and demand in a free market, an unregulated economy, it is the corperate reality some call it greed. The religion of today is money.
    I don’t need evidence it is not science it is common knowledge FFS.