by Russel Norman
The National Government has used the government deficit and debt to justify the privatisation of assets. As I pointed out in an earlier blog, the deficit and debt problem has been made much worse as a result of this Government’s very poor revenue and spending decisions.
But does privatising the assets really help the deficit and debt anyway? The short answer is no and the reason is very simple.
Our energy assets get very good returns and the Government can borrow very cheaply. This means that the return on the Government’s investment in these companies is much higher than the cost of government debt. So selling assets to reduce debt actually costs the Government money.
Treasury’s Budget Policy Statement 2012 (page 6) quantifies the cost to the Government of proceeding with the partial privatisation at $94M per year by 2016.
They come to this by projecting that lost dividends from the partial sale of the companies will be about $360M and the reduced interest payments if all the proceeds were put to paying off debt would be $266M.
So the privatisation will actually make the deficit worse because the lost dividends are greater than the reduced interest payments.
But it is actually worse than this. If you look at the assets from the point of view of an investor, then the return on the assets is a combination of the dividends they pay out and the appreciation in the value of the assets. This is called Total Shareholder Return. This is the standard approach taken by the Crown Ownership Monitoring Unit in Treasury to measure company performance.
If you take this approach, as the Minister for State-Owned Enterprises, Tony Ryall, admitted in Parliament recently, then Genesis, Meridian, Mighty River Power, and Solid Energy returned 18.5 percent per annum on average over the last five years.
That’s a staggering return if you consider the period includes the full impact of the global financial crisis on results. From a shareholder’s perspective, our energy companies are enormous cash cows.
How does the National Government justify selling assets returning 18.5 percent a year? Not easily, as Steven Joyce demonstrates in Parliament yesterday.
Treasury estimates the one-off capital injection of $5-7 billion will enable debt to be reduced and on-going interest payments on the remaining debt to fall. But the cost of government borrowing is currently only 4%, so the lower debt payments won’t cover the lost income from the partially privatised companies.
Put it this way, if you could borrow money at 4% per annum to secure infrastructure assets returning 18.5% per annum, would you invest? It’s a no-brainer.
Or looked at from the point of view of a potential buyer of shares in these privatised companies, would you really invest in companies that have a lower rate of return than 4%? Of course not; they won’t have that low a rate of return.
It doesn’t make practical fiscal sense to privatise these assets. It only makes ideological sense.
P.S. To make your own submission on the Government’s legislation to partially privatise the last of our best state-owned assets, click here.
[Note: This blog formerly contained an image of Clyde Dam mistakenly put up. Clyde Dam is clearly not for sale. Russ]