THE TRUTH ABOUT PRIVATISATION: BLOG # 11

One of the difficulties of debunking myths about privatisation is that some people do not get basic factual or economic points even when they are clearly explained.

Thus in a recent letter to the Dominion Post, investment analyst Garth Ireland wrote:

Labour leader Phil Goff says that, under Labour, there will be no asset sales (May 2). He says: “It is economic madness. The power companies return $700 million in dividends every year – that is lost forever”. But is it?

Surely the sale price received today is equivalent to the future expected dividends? Nothing is lost. Dividends of $700m a year at a rate of return of, say, 10 per cent are equivalent to $7 billion today.

Mr Goff claims that the dividends “pay for 10,300 teachers, 12,600 new police officers or 33,000 hip replacements”. He can still spend the $7b sale proceeds or the $700m each year forever. They are equivalent.

This drew the following comment on the Dominion Post website:

“Surely the sale price received today is equivalent to the future expected dividends?” I think you sir may in fact not get it. “The future expected dividend” is infinite. Inflation happens, and so does increasing dividend.

If we sell it for 7 billion, that is ALL we ever get and it will end up like kiwi rail, run down by the owners to maximise profit. The 7 Billion will become worth less and less. And we will become asset poor.

If we keep it, the value will increase, dividends will increase as electricity becomes our primary fuel source (Oil crisis), and because we (the NZ government, and by default the NZ people) will invest in it, it will not become run down.

Would you sell your kidney for short term profit? I think you would. Think long term, thinking short term led to the current problems.

The future expected dividend may indeed be infinite (if the SOE performs well). But what Garth Ireland was pointing out is that to compare the value of the asset to the Crown if it remained in public ownership with the value to the Crown of a sale, you have to discount the future (infinite) dividend stream to express it in net present value terms. People value a dollar today more than they value a dollar in 100 years’ time.

On that basis, the Crown’s financial position is no worse as a result of the sale. In fact Garth Ireland could have made a stronger point: because the new private owners of the business are likely, on average, to operate it more efficiently, the Crown is likely to be better off financially (relative to keeping the asset) because in a competitive sale process it will capture some of the likely efficiency gains.

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3 thoughts on “THE TRUTH ABOUT PRIVATISATION: BLOG # 11

  1. Dear oh dear.
    Wherever do these people get their ideas? Shouldn’t one of the parties campaign on compulsory economic/finance training at school? Now that would be a grabber for the electorate. Mind you bond pricing and the CAPM are probably not the average water fountain/playcentre conversation. Even Garth would find it difficult to hold an audience there.
    Sectare fidem.

  2. Selling one of your kidneys today is perfectly sensible if your kids have no food.

    Selling your other kidney tomorrow is perfectly sensible if your kids still have no food.

    That’s what leftists, benefit advocates, etc, simply don’t want to understand.

  3. Roger, I am afraid that discounting future values is not well understood by many people, it is not taught to many people and I am afraid the math, while simple is beyond the bulk of the public’s comprehension.

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