THE TRUTH ABOUT PRIVATISATION # 15: PROFITS GOING OFFSHORE

Last year the Treasury provided a report to its ministers headed Should we be concerned about profits going offshore?   It is a competent analysis and very relevant to the privatisation debate.

The report begins with some important factual observations which are not well understood.  One is that New Zealand’s current account deficit is dominated by investment income and transfers because goods and services have been largely in balance over the past decade.

Another is that:

The result of a long period of current account deficits is a very high net international investment position (NIIP), at about -90% of GDP. The overall position is predominantly made up of net debt rather than net equity. That is, New Zealand’s investment position with the rest of the world is better characterised as owing a lot rather than being owned.

The report then moves on to analytical issues.  It makes a point I have made repeatedly in this series:

There are two sides to the sale of an asset: a one-off payment to the seller and an expected stream of profits to the buyer. If the price is efficient, these two sides of the transaction should be equivalent: that is, the purchase price represents the net present value of the future stream of profits (i.e. the commercial value). In general, in respect of sales of government assets the value of the business to the purchaser should exceed the commercial value of the asset if retained in Crown ownership because of the greater efficiencies likely to be achieved in private ownership. A competitive sale process should ensure that the value of those expected efficiency gains are captured by the Crown in the sale price.

As regards the effect of ‘profits going offshore’ on the balance of payments, the report states:

The fundamental drivers of the current account deficit are national saving and domestic investment. Selling an asset to foreigners will only have a significant effect on the current account deficit if it affects these fundamental drivers.

A quibble here is that I would not I would not take an identity A ≡ B and C and argue that B and C are the drivers of A.  We could as easily write that B ≡ A-C and A and C are the drivers of B.  It follows that I (investment) and S (saving) are not the drivers of CAD (the current account deficit) just because CAD ≡ I – S. All three variables are endogenous outcomes, even in a model as simple as the closed economy IS/LM model.

The report then correctly points out that:

When an asset is sold to overseas investors, these overseas investors will be required to pay for their purchase of the New Zealand asset. The impact on the current account deficit will depend on how the seller of the asset uses these funds:

  • If the funds are used to increase [consumption] spending, national saving would fall and the overall current account deficit would increase.
  • If the funds are used to invest in overseas equity, there would be no change in national saving or domestic investment and therefore no effect on the current account deficit.
  • If the funds are used to repay overseas debt, there will be a deleveraging of New Zealanders’ balance sheets. The composition of New Zealand’s NIIP would change by reducing debt owed to foreigners and increasing equity owned by foreigners. Overall this would be expected to reduce New Zealand’s vulnerability, because the vulnerabilities associated with a high NIIP are somewhat greater for debt than equity

It is also important to explain that it is not New Zealand that owes the NIIP to foreigners.   New Zealand is a place, not a person. The place owes nothing.  Foreign entities operating in New Zealand can and do borrow offshore.  So do entities operating in New Zealand that are owned by New Zealanders. New Zealanders are only liable for debts they have incurred.  They are not liable for debts foreign-owned entities have incurred.     If this is not explained, lay people (and even too many economists) are led to assume that the NIIP is a liability of New Zealanders. They then start thinking that New Zealanders are ‘not saving enough’ if national savings (which is only savings by New Zealanders) is not equal to the sum of capital formation in New Zealand by New Zealanders and by foreign-owned entities.  It is then an easy step for them to then start worrying that if gross fixed capital formation is greater than national savings then ‘we’ must be spending more than ‘we’ are producing.   This does not automatically follow.

The Treasury report concludes:

In sum, we think focussing on ‘profits going offshore’ has a weak economic basis because it focuses on only part of the picture. So we do not think it makes sense to be concerned about ‘profits going offshore’ per se. The more important places to focus from a macroeconomic perspective are the overall saving and investment balance and New Zealand’s overall external vulnerability. 

In the final analysis, a concern about ‘profits going offshore’ applies to all foreign direct investment.  Particularly in an era of globalisation it is hard to make a general argument that foreign investment is bad for New Zealand.

 

 

 

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2 thoughts on “THE TRUTH ABOUT PRIVATISATION # 15: PROFITS GOING OFFSHORE

  1. Once again, far too sensible Roger, and far to complex for the financial and economic illiterate of New Zealand, and by that I really mean the reporters!

  2. TREASURY says “we do not think it makes sense to be concerned about profits going offshore….” OH REALLY?

    Oh the WEBS WE WEAVE when we set out to deceive…

    It’s TIME FOR THE TRUTH TO BE REVEALED!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    … we currently owe somewhere around $57,000 per man woman and EVERY child in NZ to offshore lenders… and Blinglish has embarked on borrowing from the FEDERAL REVERSE BANK the same bank that has toppled the financial system in the USA… (btw THOUSANDS of people are protesting in WALL STREET at the moment against the ill’s of a debt based society… but that wont be televised on the 6 oclock news each night…)

    Blinglish and the Key want to BURY NZ in debt citing that we will borrow another $75 BILLION over the next 5 years, thats ONLY another $17,000 per man woman and child…

    so it took this nation about 171 years to indebt us to the tune of $57,000 each and in just the next 5 years that will increase by 30%…. in 5 years… 30% in 5 years… and EVERY man woman and CHILD will owe $74,000 to offshore lenders (the Bosstralian banksters that is…!)

    Nice one Blinglish!

    Guess we will have to SELL OFF THE CROWN JEWELS NOW eh Blingliush and Key…

    LIKE OUR MASSIVE OIL FIELD OFF THE SOUTH ISLAND which happens to be the biggest remaining oil reserve in the world…

    oh thats right the MED aka Ministry of Economic DEMOLITION (the minister of that ‘ministry’ is none other than the ‘hon’ DAVID CARTER) approved seismic testing for Oil and Gas off the coast of Canterbury JUST OVER 4 HOURS AFTER THE 22ND FEB EARTHQUAKE …

    yes that was the earthquake in his own backyard… guess he must not have felt it then eh?
    too busy working…

    papers released to the Chch PRESS under the OIA show that TEXAN OIL GIANT AnaDARKo…. WENT AHEAD WITH ITS SEISMIC SURVEY OFF BANKS PENINSULA ON FEB 23RD … yep that was just 1 day after the BIG QUAKE…

    This is the SAME ANADARKO at the centre of the environmentally disastrous oil spill in the gulf of mexico last year…

    and ANADARKO is a 50/50 partner with none other than… ORIGIN ENERGY

    (((((((((((((((((take a look at the Companies office records in relation to companies called ORIGIN ENERGY …. and you will see a link back to $200MILLION of PUBLIC FUNDS…
    yep thats OUR MONEY…

    You will also find A NON ENTITY … yes thats right not a company, not a person but a NON ENTITY apparently sold some shares on the 27th June 2010… but there is NO PAPERWORK ON THE COMPANIES OFFICE RECORDS…

    The non entity is called EME PRECISION BV
    does that sound like a persons name or a company name to you???

    YES thats right the companies office that is governed by… you guessed it… Mr David Carters Ministry of Economic DEMOLITION…

    also richlister… Peter Masfen’s involved…

    and also Mr John FOOTE of PERPETUAL TRUSTEES (ex National Mutual with links to none other than… YOGESH MODY the man who COLLABORATED with NEVILLE HARRIS from the companies office to DELAY the SCF prospectus from being issued to PUNCH A HOLE IN SCFs CASHFLOW to help drag scf down… YES … They MANUFACTURED delays… )))))))))))))))))))))

    BUT FOR NOW BACK TO AnaDARKo and the oil field

    Drilling was scheduled to begin next month or else it had to surrender it’s permits BUT…

    it applied for and was granted an extension so DRILLING is apparently scheduled to start in october 2012…

    So… at 5.28pm on feb 22nd
    thats just 4 hours after the BIG QUAKE…

    MED (crown minerals geoligist) Dave Witkowski sent an email to Bruce Morris of BDM Consulting and British based Simon Robinson – AnaDARKo’s seismic acquisition specialist – saying AnaDARKo’s application to begin seismic data acquisition in the “afternoon or evening of February 23” SHOULD NOT BE HINDERED by the quake…

    NZ AnaDARKo spokesman Allan Seay confirmed the SINGAPOREAN vessel MV AQILA explorer began it’s seismic data acquisition on Feb 23 in the 2 permit areas AND… over an adfjacent NON-PERMIT AREA…

    that’s right over a NON-PERMIT AREA!!!

    Witkowski said he had been “FIRMLY DIRECTED FROM THE TOP” not to comment…
    Wonder WHY??????????????????????????????????????????????????????

    Ministry spokeswoman Tracy Dillimore confirmed the application for seismic line tails should have been approved on Feb 22nd but was not officially signed off until FEBRUARY 28th…

    Seay said seismic acquisition of data took place “more or less continuosly 24 hours a day” between Feb 23rd and March 28th. During this time Canterbury experienced a SWARM of about 2,000 quakes, 655 of which were big in magnitude from 2.8 to 5.9

    Seay said methods used included an array of “24 airguns”. The impulses created by the release of air from arrays of up to 24 airguns CREATE LOW FREQ SOUND WAVES POWERFUL ENOUGH TO PENETRATE UP TO 40 km BELOW THE SEA FLOOR known as REFLECTION SEISMOLOGY…

    Many scientists worldwide believe that this seismic testing for Oil and Gas TRIGGERS SEISMIC ACTIVITY!!!

    Interesting to note that GEOTECH engineer ROGER LAMB who lived in the Port hills recently died in unusual circumstances in morocco whilst on a well deserved holiday… as did his wife… sadly leaving behind 4 boys as orphans…

    So its not only OUR profits going offshore…

    it is our PRECIOUS mineral reserves
    our GOOD peoples LIVESbeing taken
    and the nation is being enslaved by debt…

    GOD BLESS ALLAN HUBBARD

    Its time for the South Island to consider becoming an independent nation dont you think ROGER?

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