Bowden is a former Professor
of Economics and Finance at the
Victoria University of Wellington.
a visiting research fellow in
financial system design at Ulm University in Germany. He
has worked at a number of offshore institutions, including the
New South Wales
as Professor of Finance. In addition Roger has been visiting
Professor of Economics at the universities of
British Columbia; held a Humboldt Foundation Senior Research
; and visiting fellowships or appointments at the
, CEPREMAP in
, and the IBRD Development Research Department in
. He holds the degrees of BA,
(mathematics and econometrics,
), PhD (economics,
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Hospitals and Raw Prawns: Those asset sales again
forthcoming state asset sales are necessary, Mr Key tells us, to finance
‘more schools and hospitals’. Or
recently from Mr English, ‘more schools in Christchurch’, which seems
odd, because right now they’re being closed down.
bring Abraham Lincoln’s famous quote
up to date, ‘you can fool too many people too much of the time’. Where
the Key Gang is at work, watch for the insouciant hand waving – as
though things are all just too obvious too elaborate.
will the outcome really be Schools and Hospitals?
Or are the float funds reserved for something else; if so, what?
And will it all work anyway?
places to start looking are the budgeted expenditure appropriations on the
Treasury website. You don’t have far to look for at least one ‘heads
up’: Vote Treaty Negotiations.
start with the annual appropriations for running costs, covering such
things as negotiation costs, the Waitangi Tribunal & representation,
and disbursements under the Marine and Coastal Area (Takutai Moana) Act.
The 2012 budget request is $169,969m. The same annual sum (can it ever
diminish?) capitalised over 10 years at the current NZ govt bond yield, as
the opportunity cost of capital, comes to $1,409m.
add in the cost of outstanding and projected settlements up to 2016
(not 10 years, but bear with me here), amounting to $2,800 m.
Together with the capitalised running costs, that comes to $4,209m, if my
arithmetic is correct.
not sure whether this includes the ratchets promised to Tainui and Ngai
Tahu in previous settlements, which at the time envisaged a total of $2
billion instead of the $4 billion so far awarded or projected. Last I
heard, Tainui and Ngai Tahu will be sharing a top up of $138.5m, but there
will be more down the track as the settlements continue to mount. Nor does
this year’s Waitangi Vote allow for future annual costs under the
‘co-management’ regimes that are becoming the norm for Waitangi
any way you add up the sums, the message is that present and future
commitments under just the one Vote, Treaty Negotiations, will comes to
something like 5-6 billion dollars in total present value, probably even
more. It’s hard to find Votes with a similarly spectacular explosion. No
doubt there are others on a smaller scale; the ministerial travel budget,
perhaps? But otherwise, even the traditional biggies like Health and
Education seem under control, at least on Treasury projections, especially
for Education, which is projected to level off, even turn negative. Expect
yet more belt tightening after the latest revenue figures.
let’s return to those partial asset sales. It’s not altogether a
surprise that the Mighty River sale, and likely others, has turned out
such a can of worms. It’s going to need yet another deed of settlement
with Tuwharetoa over the use of Lake Taupo, this one for water storage.
And even if the government surprisingly wins the ensuing court case over
the Waikato River, there will inevitable be iwi ‘disbursements’ of one
kind or another for further lakes and rivers, along the model of the
Marine and Coastal Area Act. Contingent
liabilities of this kind don’t appear in the current Treaty Vote.
gets worse if the government ultimately loses the court case(s). In that
case the floodgates are opened for a raft of historical Waitangi claims
for water use everywhere: power stations, town supply water, farming, fish
and game; you name it. The contingent liability is huge.
conclusion is inescapable. We need the partial asset sales to finance the
soaring costs of the Treaty industry. That remains true even if we accept
the distinctly optimistic official estimate of $6 billion for the asset
floats. Let’s all hope that the NZ stock market remains in good nick,
commodity prices hold up, and the September quarter unemployment rise was
just a blip.
hang on, the ‘pollies might say, Treasury analysis
tells us that the asset sales will be positive net present value (NPV). In
other words, the government will lose some state owned enterprise income,
but the present value of the income shortfall will be less than the
capital value earned by the float. Whatever the money is spent on, so the
argument goes, we’ll all be better off.
from some debatable claims about superior efficiency, the magic trick is
evidently the corporate tax that the government can levy on the
semi-privatised assets, 49% of which is now to be borne by shareholders.
The government selleth and the government taketh back. That is a tricky
argument, if only because the corporate tax liability should then appear
upfront in the capitalised value of the shares and hence the proceeds.
There is no such thing as a free lunch. The trick can work if the private
sector cost of capital (discount rate) is less than the government’s.
But let’s be honest; nobody knows just what cost of capital should be
used for any valuation decision, whether private or public.
are pros and cons on all these aspects.
own view is the budget estimates of the float NPV’s were on a wing and a
prayer to begin with, even before you factor in the lower earnings now
being priced into the forward electricity market. But
once you start thinking about the magnitude of the contingent Treaty
liabilities unleashed, forget the wing and let’s just all pray.
the meantime, the government has just announced that it will allow iwi
currently in the Treaty line up to purchase an assured allocation of
shares as an advance on their settlements. It’s starting to look like a
Ponzi scheme, for they will be able to access a special cash fund to do
it. Where is that that cash to come from? The answer can only be from
prior and ongoing asset sales. It’s marketmaking with a twist, and it
means other Kiwis will have to pay more for the residual shares.
the pro’s and con’s (there are both) of the proposed asset sales, one
thing is clear. The whole process is a potentially good idea gone bad and
starting to smell. Don’t hold your breath on the schools and hospitals.
can fool some of the people all of the time, and all of the people
some of the time, but you cannot fool all of the people all of the
See e.g. table 2.16 ‘Data
and Charts - Chapters 1 to 3’ Budget Economic and Fiscal Update
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