Monday, 2 May 2011

Selling assets to pay for the quake

This morning's Press speculates about whether Christchurch might sell off some of the town's corporate assets to help pay for reconstruction. It isn't ruled out by earthquake recovery legislation, so the folks who like to be paranoid about privatization think there's a secret agenda.

Under what conditions is it optimal to sell off assets post quake? It depends a whole lot on whether the city is credit constrained, whether the city has better inside knowledge on the likely path of recovery, what information people might draw from asset sales about that knowledge, and whether it made sense for the city to own the facilities in the first place.

If the city is not credit constrained, then the earthquake is largely irrelevant. Recall that the best argument for Council ownership isn't whether the asset returns a positive financial return on investment but rather that difficulties in contracting for particular kinds of service delivery combined with differential incentives across private and public ownership may make public ownership sometimes optimal. It may be simpler for the Council to own the local power lines company Orion than for it to attempt rate of return or other forms of pricing regulation on the natural monopoly utility.

If the set of assets held ex ante by Council were optimally held by Council, then the main driver of post quake divestiture, absent credit constraints, is if Council's costs of ownership increased with the earthquake relative to the private sector's costs of ownership. The earthquake could plausibly have just made it a lot harder for Council to keep on top of its varying interests and so divesting itself of some assets that require more time and attention than Council's now able to give could make sense. I don't know which if any of Council's assets would fall into this category.

A second reason for divestiture would be if Council expected a faster depreciation of those assets than the private sector expects. If Council thinks land values will plummet, selling off land before that happens would make sense. But if everyone reads into a Council asset sale that Council has inside knowledge that things are worse than folks expect, and if there's uncertainty about outcomes, and if expectations about outcomes drives selection among multiple potential post-quake equilibria, then Council could do better by holding off on those sales or by making complementary investments that serve as countersignalling.

That changes where Council is credit constrained. If borrowing for the rebuilding becomes relatively expensive, selling off some assets that had ex ante been best owned by Council could make sense. The losses from a slightly less efficient ownership structure would be smaller than the increased borrowing costs otherwise incurred.

But all that's predicated on Council's holdings being ex ante efficient. Here's the list, according to the Press:
Christchurch City Holdings Ltd (CCHL) is the commercial and investment arm of the Christchurch City Council. CCHL manages the ratepayers' investment in these seven fully or partly-owned council-controlled trading organisations: Orion New Zealand Ltd – 89.3 per cent shareholding. Christchurch International Airport Ltd – 75 per cent. Lyttelton Port Company Ltd – 78.9 per cent. Christchurch City Networks Ltd (trading as Enable Networks) – 100 per cent. Red Bus Ltd – 100 per cent. City Care Ltd – 100 per cent. Selwyn Plantation Board Ltd – 39.3 per cent.
They seem to have left out VBase, which I'm pretty sure is Council owned.

There's room to argue about whether Council needs to own the bus company. As they've already facility in place for different companies to bid for routes, the efficiency gains from privatization are limited, but so too are the contracting costs for outsourcing. Seems a reasonable candidate for sale. I can't see any particular reason why Council should own the Port at Lyttelton. Facilities there had seemed on the decline prior to the earthquake; insurance-funded reconstruction could put the Port into a really good position for sale. Selling off some assets that were at best questionably owned by Council makes more sense than earthquake levies.

Update: See Roger Kerr's summary of positive privatization outcomes elsewhere in New Zealand.

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