Mixed ownership model: pros and cons

New Zealand

New Zealand (Photo credit: erjkprunczyk)

 There is a lot of  emotive rhetoric flying around at the moment on this subject.

On the pro-sale side  the main arguments are:

The injection of new private capital which could enable expansion and thereby improve the worth of the companies.  Of course a percentage of any future prosperity could be owned offshore – depending on how many kiwis hold onto their shares rather than sell them.

Inclusion of international and private sector management expertise could help improve allocation of resources and performance.

NZ ownership is the important thing – not necessarily government ownership:  This is true in terms of the impact on the Current Account.  The problem for the wider economy is that New Zealanders can and often do sell their shares and other assets to overseas buyers. Once the government sells shares then the health of the current account and of NZ ownership rests entirely on the whim of the new private shareholders. There is also the question about just how many kiwi households can afford to buy shares in the current economic environment. Higher income groups are most likely to have the disposable income to acquire shares. This is not great for building social cohesion.

If New Zealand superannuation funds and other kiwi funds managers pick up the bulk of the shares being floated then NZ ownership could be largely maintained with a reduced risk to the government’s balance sheet. his is true but it relies on funds managers deciding that the former SOEs are the best place to invest their clients money compared to overseas properties.

On the anti-sale side the arguments are:

Share sales won’t reduce debt:   The government has already said it will spend some of the sale proceeds on buying other assets – such as new school buildings.  As you can’t spend the same money twice taxpayers might well ask precisely how much debt will be repaid from the sale proceeds.

Asset sales wont help reduce the current account deficit:   There is also a difference between the government’s own debt and that of NZ Inc. It’s NZ Inc’s debt that is the major challenge.   The government’s books are in reasonably good shape compared to many other governments.   If the post-privatised SOE‘s make profits then more of the dividends will be sent overseas if there are overseas shareholders – which seems likley to happen over time.  This would make the Current Account deficit worse – not better.

Electricity prices for households will rise if we sell the assets: In private ownership the last semblence of informal political accountability for price rises and service levels will be removed.  Purists will say that is a good thing because each commercial decision (including electricity charges) will truly be made on what is best for private shareholders.  While private shareholders may benefit from such price rises electricity consumers will not fare so well. Purists might also argue that the market is so competitive that the companies won’t raise prices beyond efficient levels. 

If we privatise then the dividends we currently enjoy will be sent offshore.  This will be true to the extent that shares are sold to overseas owners – either at the initial share float or later as kiwis sell to overseas buyers. The dividends which these companies have been earning for NZ will cease – or at least reduce once the shares are sold. If the dividends over time add up to more than the debt reduction from the sale proceeds then arguably we should keep the assets in government ownership.

Management control: In the long term if the ownership ends up in overseas hands then the head office and management direction will come from offshore and kiwis will lose control of intellectual property, decisions around employment and sub-contracting, and investment policy.

On balance the critical issue is how best to retain kiwi ownership over the long term of the assets while allowing them to grow and innovate.  Ownership by the NZ superannuation fund, iwi organisations and the government appears to be the best means of protecting future economic returns and enhancing national sovereignty.    

Then, apart from the economic issues there are the political dimensions – there is widespread discontent with the policy.   In light of the minimal economic benefits of privatising one wonders why the government is intent on progressing this issue but is not willing to move ahead with major reforms in areas such as superannuation.


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