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Professor Roger Bowden

Professor Roger Bowden

Schools, Hospitals and Raw Prawns: Those asset sales again

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The 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.

To bring Abraham Lincoln’s famous quote 1 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.

So 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?

The 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.

Let’s 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.

Now 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.

I’m 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 settlements.

But 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.

Now 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.

It 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.

The 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.

But hang on, the ‘pollies might say, Treasury analysis 2 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.

Apart 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.

There are pros and cons on all these aspects 3.  My 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.

In 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.

Whatever 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.

  1. ‘You 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 time.’  
  2. See e.g. table 2.16 ‘Data and Charts – Chapters 1 to 3’ Budget Economic and Fiscal Update 2012
  3. One might add another nightmare for the Government: that this might be another Facebook where the post float company earnings fall well short of the official forecasts. Awkward, having our own ostensible servants do the forecasting!