Recall that I've previously argued that the "but the bond financing cost is lower than the flow of dividends" argument is nonsense because it says the government should borrow to invest in the stock market where stock returns are higher than what the government pays in interest; it ignores that stocks are riskier assets than New Zealand government bonds.
What really matters is whether an asset is better managed publicly or privately. If the assets are more efficiently held publicly, the "loss of flow of dividends" critique can make sense: in that case, a private owner is willing to pay less for the shares than the flow of dividends is worth to the government. Otherwise, a high dividend flow just means the asset's selling price is bid up. If the private owner expects efficiency gains, competitive IPO markets push the asset's selling price to being higher than the discounted value of the current revenue stream.
So, how does BERL approach the problem? They assume that revenues from asset sales are used to build other assets that yield dividends equal to the returns on the sold assets but that time-to-build means a few years' delay in getting the flow of assets from the alternative stream. It's then not particularly surprising that they find that asset sales are a dumb idea. It would be hard to find anything other than "privatization is a dumb idea" given that starting point. They also assume that borrowing costs are lower than dividend yields and conclude that it makes more sense to borrow than to sell off assets. They do some year by year projections going forward on the basis of the assumptions, but all that time path depends on the question-begging at the outset; I'm not going to get into whether they got the time series right.
BERL also seems pretty worried about effects on the country's net external debt position. So they set up scenarios comparing asset sales, where buyers may be foreign or domestic, with a bond issue, where bonds are assumed to be bought only by domestic investors. On this basis, they find that the asset sales will hurt net foreign liabilities. Perhaps their conclusion would have changed if they considered that foreign investors do sometimes also buy our government's debt, or that domestic investors can on-sell government bonds to foreigners.
Further, when BERL makes the case for debt over asset sales based on the difference between the government's cost of borrowing and the dividend yield from state owned enterprises, they don't seem to adjust for that dividend yields tend to be higher because asset owners need a risk-based return. If it doesn't make sense to take out a mortgage on your house at 5% because you can buy stock in a company that usually pays 6% dividends, it probably doesn't make sense for the government to do it either.
As a fun robustness check, they compare their results against a scenario where the new investments yield lower dividends than the new investments. Unsurprisingly, they find that privatization is then even worse!
I'll agree with BERL that some of the benefits of partial privatization seem overwrought. I've been critical of partial privatization, and especially of starting with the energy companies. But if this is the best case against partial privatization that the Greens can come up with, it sure isn't convincing.
Previously:
- Perils of partial asset sales
- Partial Privatisation: Hazledine (vs?) Crampton edition.
- Selling assets to pay for the quake
- Optimal quake financing
- Don't sell the lines company, sell the Port.
- Sell it already
- Seamus: Justification for partial asset sales
- Seamus: Should Meridian be Privatised
- Me in response to Seamus: Voter Preferences and Electricity
