The asset sales "trade-off" - a lose-lose

The partial asset sales are a compromise, according to the SOE minister. But why are taxpayers the ones left with the beads and blankets while the other bloke laughs all the way to the bank?

Another week, another "trade-off" for National to sell. This time it's state assets. While Tony Ryall's a much more adept and experienced salesperson than Hekia Parata, he's still got a heck of a battle to square the circle on this one.

Ryall appeared on Q+A this morning, ready to argue the case for what National's calling its mixed ownership model and armed with the government's strongest lines. As we all know, National will this year start selling 49% shares in five state-owned companies. Mighty River Power's first on the block, followed in no particular order by Genesis, Meridian, Solid Energy and Air New Zealand (almost certainly the last plane off the runway, as it were).

So why does National think these partial asset sales are such a bonza idea?

At the heart of its argument is debt. As Steven Joyce said again in parliament this week, mixed ownership is "about controlling the nation's debt".

But now Ryall admits that the profits from Mighty River Power won't be used to pay down a single cent of debt. Nope, no debt will be paid off thanks to this sale (and presumably the others). The only way these sales tackle our public debt is that they save us from borrowing more money for schools, hospitals and KiwiRail.

Underwhelmed? Putting aside the fact our current public debt is low and even the IMF have shrugged and said 'meh' when they looked at it recently, if debt is so central to National's economic and political concerns, then you'd think they'd spend some of the profits on actually lowering it.

Ryall frets that our government debt is on the rise, however, from $52 billion now to $72 billion in three years. But that only goes to reinforce that the asset sales will make sod-all difference to the size of that debt. National, if things go according to Treasury's guesses, hopes to pocket about $1.8 billion from Mighty River Power. Even my maths is sufficient to see that a portion of $1.8 billion is a drop in the hydro lake that is $72 billion.

What it does, is help out a little for the next three years, while this government is trying to get back to surplus; so it helps National in the short-term. But our debt is set to leap after 2020, with or without these sales, as baby boomers' superannuation and health care costs kick in. So what's being done about those? Oh that's right, we're not allowed to talk about them while John Key's Prime Minister.

So the debt argument just doesn't stack up.

But it's worse than that. Not only do the sales not pay down any debt, the loss of dividends from these companies must ultimately mean more debt somewhere down the track.

Bernard Hickey pointed out to me this week that over the past ten years the companies primed for sale have delivered a return on capital of 16%. Government borrowing is currently near an all-time low, at around 3.5%. So we're sacrificing 16% to save us 3.5%? How does that make economic sense?

Yes, returns may go down and borrowing costs will go up. But even if you think privatisation is OK in principle, you'd have to question selling at a time when you're making good money and borrowing is so cheap.

So what about the idea that these sales give Kiwi "mums and dads" something to invest in other than bricks and mortar? Heck, we all want fewer people investing in rental properties.

"We think that the whole mixed-ownership programme is about providing more opportunities for New Zealanders to invest in the New Zealand sharemarket," says Ryall.

But is it really the government's role to rescue our anaemic stock exchange? If it's ideologically opposed to not creating jobs -- they're not "real" jobs -- then why should it create companies? Are these not going to be "real" companies?

What's more, how many mums and dads have spare investment cash anyway? And shouldn't they be paying off their huge household debt with any extra money, rather than dabbling in the sharemarket?

Nope, that argument doesn't make sense either.

Which brings me back to the "trade-off". That didn't go so well for National when they tried to apply that phrase to class sizes and teaching quality. But this time Ryall insists it's a good idea. Check out his answer on that:

"Certainly, if the government had decided to adopt the approach that we saw in the ‘80s and the early ‘90s, where the government was just going to sell the 49% stake to the highest bidder - maybe 49% to an overseas bidder - we might get a better price than we would if we weren’t going to have a float on the sharemarket. But I don’t think we’d get the support at the election that we got if we had proposed that. So this is not like the asset sales that we’d seen in the ‘80s and early ‘90s, which was selling them off to whoever the highest bidder is. This is a different approach...

"There is a tension, a trade-off, between selling the whole lot, the 49% to one investor, like they did in the ‘80s and the early ‘90s, versus trying to make sure we have widespread New Zealand ownership. We’ve always been upfront about that. There is a tension. But we would not have the mandate that we got at the election if we had proposed that..."

It's fascinating to burrow into that. For a start, I'm not sure how upfront they've been about that trade-off and tension. Do New Zealanders realise we're accepting less for the assets this time round? I think not.

Second, the reason National MPs chose not to sell to a single buyer is that they thought it could cost them the election. As it stands, National says it has a mandate because it won the 2011 election even though polls show the majority of New Zealanders oppose the sale. And on that point, I agree.

But Ryall is suggesting that selling to a single buyer - probably a foreign corporate - would have lost them the election and the chance to sell anything at all.

You might say that instead they listened to the public and designed a policy that was unpopular, but not so unpopular as to cost them power. Or you could go further and say that National is accepting a lower price for our assets because it suited their political ends, not our economic best interests. That just seems wrong.

And what was the key "trade-off" needed to keep people happy (enough)? The fact that the assets could be bought by New Zealand funds and, more importantly, Kiwi mums and dads.

You'd expect ACC to buy close to its 10% maximum portion, and if the Cullen Fund sticks to its index it will end up buying about 4% (although it may well make an exception and go higher in this case). KiwiSaver funds and iwi will take a decent share. So a fair share is likely to stay in New Zealand for the medium-term, as Ryall says.

But let's be straight. There's nothing in the bill that keeps that 49% share in New Zealand hands - not inf five years, 10 years, or my life-time. No incentives, no guarantees. So is that a smart trade-off? We've sacrificed profits to get National elected and place most of the shares in New Zealand hands when the companies are floated. And after that, the shares could be owned by anyone in the world.

So in this trade-off we lose 49% of the companies and the best price, but we get... temporary New Zealand ownership that could be sold away when the price is right.

Doesn't sound like much of a trade-off to me. And most voters agree. It seems we're the ones getting a few beads and blankets while we wave goodbye to the money-making resources.

Winston Peters may just be onto something when he says this was the week that National lost the next election.