Big picture, he's almost right. Unless privatization comes with an increase in firm profitability, there's an equivalence between the value of the flow of dividends coming from the asset and the selling price of the asset. In that case, fire-sale prices reflect the real reduction in value that comes from holding a damaged asset: it's worth less either to Council or to a private firm. So it doesn't make much difference whether Council borrows against the flow of earnings from its holdings or sells its holdings. It's not idiotic to sell off assets, but it doesn't do a lot of good. Unless the privatization increases value. Or, unless Council faces financial market constraints on borrowing. I'd explored things in more depth a year ago.
So I'm not sure there's much case for selling off the Council's power lines company, Orion. We'd have to replace monopoly Council ownership with regulation of a natural monopoly; I can't see a whole lot of gain to be had either way. It's sure not the first place I'd look for potential privatization.
But what about Lyttelton Port of Christchurch? An insurance-funded rebuild of the Port's capital stock could put it in better shape than it was prior to the earthquake; there's a good case to be made for privatization bringing efficiencies to port operations. It's (as best I understand things) the threat of those efficiencies that had Port Otago block Christchurch Council Holdings' attempt to sell the port to Hutchison Port Holdings five years ago. It wouldn't be crazy to argue that Council might never get a better price for the Port than when it's all bright and shiny with fresh infrastructure, so long as LPC is able to get insurance settled. If the Port can earn greater returns under private ownership than under Council ownership, then privatization is far from idiotic. At latest share prices, it's worth about $200 million.
knock knock Eric, nobody wants to invest in Christchurch
ReplyDeleteLyttelton, as best I understand things, mostly exports coal and logs from the hinterland. That shouldn't drop off regardless of what's going on in Christchurch.
DeleteInvestors leaving Christchurch now Eric, massive losses, flee Eric, if I can you can,after all you have rich Canada
ReplyDeletePlenty of people will invest in Christchurch. The current lot of older investors won't be interested but there's profit aplenty just waiting for the next generation.
ReplyDeleteI suggest existing investors running scared cut their losses and get out as quickly as possibly, it will clear the decks for those with vision to get on board. There will be more opportunity in Christchurch over the next decade than anywhere else in NZ.
As for your position on asset sales, ownership of the assets is about more than just financial efficiency or return on a dollar investment. The assets exist to service and enhance the community we live in, not just to provide a maximum return for shareholders.
As ratepayers, we will pay for the rebuild, but far better we do it transparently and up front, rather than through flogging off our infrastructure for a short term cash injection, then living with permanent rate increases as a side effect.
Budget for the rebuild, raise the cash, then pay it back with a specific EQ levy that expires as soon as the funds have been raised.
LPC can do most to service and enhance the community by being sold. You might expect that, over the next decade, Council will have zero funds to invest in enhancing the Port; private capital just might be useful.
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