Monday 21 May 2012

Sell it already

Christchurch Council is again being encouraged [see also NBR] to consider selling off some of its holdings to help pay for the earthquake rebuild. Labour is predictably outraged:
Labour Party SOE spokesman and Christchurch-based MP Clayton Cosgrove said Carter's comments on Sunday "proved beyond doubt central government’s intention to see Canterbury’s assets sold off."
“This issue was raised over a year ago when the CERA legislation was before Parliament. This was not a part of the deal. The Minister’s rationale - that councils should sell down infrastructure to survive - is ludicrous," Cosgrove said.
“These are revenue generating assets which have sizable returns for the whole community. Selling these off to fulfil National’s agenda is foolish," he said.
"This is a nationwide issue. Selling revenue generating highly profitable assets which are providing a solid rate of return at a local level is about as logical as National’s plan to sell our revenue generating state-owned assets.
“Canterbury’s profitable assets have kept local rates in check. To hear the Minister say that he would rather give up that revenue stream to pay for the disaster that has befallen our City makes a mockery of the Government’s commitment to Canterbury’s recovery," Cosgrove said.
Cosgrove can only be right where the asset is more efficiently owned by local council, or where there are serious problems in IPO markets, or where the Council has a particular kind of stupidity.

If the asset is best owned by government, then the selling price will be less than the discounted value of the dividend flow. Otherwise, local Councils can do better by selling off the asset and taking the cash.

If there are serious problems in IPO markets, then things sell for less than fundamental value at IPO. But there's no particular evidence of this.

The last one might be more of a worry. Imagine a guy who has a trust fund that pays him a modest annual income. He generally is foolish in how he spends it, but he's always able to pay his bills. If he is given the investment as a lump sum, he blows it all on pop rocks and bungee jumping and has no income flow for the next year. That guy is probably better off not being able to sell off the dividend-paying asset. Is Christchurch Council that guy? Hopefully not. But post-quake, unless they're dumb enough to blow it all on stadiums, there are tons of productive ways they could be spending the money - roads, sewers, turning Red Zone into useful parks.

And, if Council is dumb enough to blow any divestiture returns on pop rocks and stadiums, are they smart enough to handle the asset properly if they own it in the first place? Note that an asset like the Lyttelton Port of Christchurch isn't like a hands-off trust fund; it requires annual decisions about asset maintenance versus dividends. Cosgrove talks about how the revenue stream from assets helped kept rate rises in check; what reports I'd heard on maintenance standards at the Port as of a few years ago suggested that Council was putting a fair bit more weight on current dividend flow than on maintaining the assets. Divestiture may be a bad idea if Council is prudent enough to manage the asset properly while they own it, but profligate if they're handed a lump sum of cash; under the current circumstances, with plenty of really pressing financial needs, I'm less worried about this one.



  1. Generally speaking I'm opposed to asset sales, mostly from an idealogical viewpoint; I think it preferable to keep a profitable asset which will give steady returns over time than to sell it and take the short term windfall. During the normal course of events this is my position. However, I recognise that Chch City is in a difficult position at the moment, it has unexpected and extremely large financial commitments thanks to mother nature. If ever there was a time when a decent argument could be made around selling some of the City's assets I guess now is it.

    1. Some things are better owned by government, other things aren't. Blanket positions against asset sales requires that the current set of Council holdings is the optimal one. Does that seem likely?

    2. I think it is reasonable for the CCC to have a number of different revenue streams, and in normal circumstances I'm quite happy for the CCC to own a number of businesses and assets, assuming they are being well managed and are likely to provide a good return in the medium to long term. I'm no fan of selling something profitable just because you can get a one-off windfall, it seems short-sighted to me. However I've heard suggestions that the LPC in particular is likely to incur significant costs replacing wharves and upgrading other infrastructure. If this is the case, and it is a result of poor maintenance over the years, then a case could be made for flicking it off now to save the CCC future costs. If this is earthquake damage, and insurance companies are going to shell out for the damage then I see no real value in selling the LPC assuming it continues to be profitable. Better the CCC borrow to cover the short term deficit and rely on its revenue streams to help pay back the debt once things have returned to at least a semblance of normality.
      Of course if JonKey has laid down the law, and local councils are required to sell off stuff which isn't considered core infrastructure the point is moot.

  2. I have a distinct feeling that selling Christchurch assets will be bad to us.
    I would rather Aucklanders pay us our way out, just as Greece would like Germany pay them out.
    Now I know the resistance has started and another serious earthquake here would possibly call for other NZ to abandon us.

    If we sell assets our rates must up to that level of income lost , and Christchurch will continue to fail.
    Al of this is a National situation, and reports are coming in now that household Insurance nation wide is on the increase.
    Winston Peters had a good point.
    We paid premium premiums since the Napier earthquake and where did that money go.
    I am off oversea, I was so sure they would knock at my door to rent this place, but there is no shortage of rentals at all, just a shortage of people prepared to pay.
    Woe is Christchurch. Flee now for your life Eric, take woman and childs and flee

  3. The theory about the discounted value of the selling price being less than the dividend flow doesn't happen in practice. Read and weep

    1. I've not argued for selling off the local lines company.

      I'm also less than convinced that anything in the Sue Kedgely piece you're linking shows that the asset was sold too cheaply. The asset went on to be worth more, but improved management can drive that as well. Or, increased certainty about the ongoing regulatory environment.

    2. And Kedgely makes great play out of the fact that every time the asset was sold it was sold for more than the previous time. It is hard to square that with a world view that governments sell assets too cheaply, and the private sector then simply maximises profit.