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SMELLIE SNIFFS THE BREEZE: Why sell state assets?

Friday 28th May 2010

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One big problem about the argument for privatisation is that the most politically palatable reason for doing it - reducing the public debt mountain - is no longer there.

New Zealand's public debt is more of a mound than a mountain these days.  Even with one of the largest fiscal stimulus packages in the western world over the last couple of years - the International Monetary Fund says the combination of tax cuts and infrastructure spending added 6% to GDP over 2008-2010 - net public debt still tops out at less than 30% of GDP over coming years.

By the standards of the rest of the OECD, and especially debt-drowned Europe, that's not just respectable, it's downright thrifty.  Greece is knocking up public debt to around a dangerously high 115% of GDP. And Spain, Portugal, Italy, Ireland and others face similar fates, whether or not the current bout of Eurozone hand-holding saves the world from another credit crunch.

However pleased Finance Minister Bill English may feel with himself for pulling this off, it's completely unhelpful as he leads the government stumbling into a debate on privatisation.

The big reason for asset sales, when they first came on the scene, was that they were one of the only easy ways to get mad levels of public debt under control.

In the absence of that threat, why bother?

The fact is that far too few New Zealanders have ever believed that selling a public business to private owners produces better results.  There is long term simmering distrust that neither Telecom nor Contact Energy have done better by consumers than they would have under state ownership. The deep sceptics point to the re-nationalisation of Air New Zealand and KiwiRail and the launch of Kiwibank as proof that private ownership is no panacea.

Ignore for a moment that Telecom and Contact have undoubtedly done a better job than they would have under government ownership, and that as Telecom's future hangs in the balance in a ultra-fast changing world, taxpayers should welcome the fact that it's private shareholders - two-thirds of them offshore - who are exposed to losses as Telecom's share price has plummeted to historic lows.

Ignore, too, the fact that KiwiRail was a dog that should never have been bought back and that Air New Zealand would be a subsidiary of Singapore Airlines - the Emirates of the Far East - had Labour Ministers not had a nationalistic panic at the prospect nearly 10 years ago.  If that were the case, it would be Singaporean rather than New Zealand taxpayers who would be wearing the risk of the appalling economics of international aviation today.  The fact that Air New Zealand remains well-run is a tribute to its management, not its owners.

However, the political fact remains that there is a sizable group of Kiwis who get as cross about privatisation as they do about mining.  Despite government asset sales being uncontroversial just about everywhere outside North Korea, it's still a bellwether issue here.

So the government needs a better economic reason for selling than the slender economic reed that says private ownership trumps public, and if the books aren't in bad shape, then why sell anything at all?

The answer, helpfully hinted at by the International Monetary Fund this week, is that New Zealand's public accounts may look OK, but they only help to offset the ongoing ugliness of the country's foreign debt mountain.

True, most of that foreign debt mountain belongs to the private sector and, ultimately, to over-stretched households that piled on debt before the global financial crisis.  At 135% of GDP, New Zealand's total foreign debt is officially as scary and potentially destabilising as a European country whose government has gone way too deep in hock.

Whether New Zealand is really too deep in hock to foreigners is arguable.  Every Australian investment counts as a foreign liability, and retained earnings in New Zealand belonging to foreign-owned companies count on the balance sheet against us.  If this was California, which runs a perpetual "balance of payments deficit", no one would bat an eyelid.

It's likely New Zealand should expect to run higher levels of foreign debt than, say, Japan or Germany.

It's the primary driver - along with low productivity and sluggish exports - of current account deficits into the future at around 8% of GDP - a level of annual national shortfall with the rest of the world that is far too high to sustain in the current, debt-averse age.

So, while high foreign debt is not, strictly speaking, a problem the government created, it is nonetheless one that a government can not only help to fix, but must try to fix.

The Budget tax package was one part of those efforts.  Its underlying goal was to shift in favour of rewarding savings and productive investment, rather than borrowing and sinking capital into housing - a message uniquely suited to the frugal mood of the times.

The Budget in turn supports a raft of other work, most notably the action spurred by the Capital Markets Development Taskforce, which aims to give New Zealand savers something more interesting to invest in than a breeze-block unit rental unit in some benighted suburb.

But where are those opportunities to invest in New Zealand going to come from?

How about a slice of MightyRiverPower, or Meridian, or Kiwibank, or a chunk of any number of state-owned companies that would benefit, at the very least, from the disciplines of having to report to active shareholders.

If it makes everyone feel better about, then let the government remain a cornerstone shareholder, so that economic sovereignty isn't ceded.

But if New Zealand's greatest remaining and arguably most long-standing vulnerability - a reliance on the savings of people in other countries - then there have to be things to invest in at home.

Privatisation isn't the complete answer to that.  But it would help - and it would even keep those flinty IMF types happy.  They're really worried about this ongoing foreign debt exposure, even if most New Zealanders only vaguely get it.  And they reckon Key and English should be hacking much harder at bloated government spending to improve national savings.

Key and English know them IMF is right, but they're not about to blow their political support by emulating Roger Douglas or Ruth Richardson.  Selling some of the family silver, carefully handled, could provide the same effect, but with nothing like the political cost.

Businesswire.co.nz



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