Friday, January 28, 2011

The smartest men in the room

Remember how chuffed everyone was that the reigns of govt were being taken over by John Key and Bill English, men who understand economics? Unlike their predecessors Helen Clark and Michael Cullen, who were so ignorant they used years of govt surpluses paying down debt rather than giving rich people the tax cuts they wanted?

Funny how things work out, isn't it? These incoming Gods of Finance retained the more excessive spending of their predecessors (interest-free student loans and Working For Families) because doing otherwise would make them less popular (note - not "lose the next election," because after all they're going up against Labour led by Phil Goff in the next election, but "less popular"), and have now decided to sell public assets to reduce debt.

There's a fairly obvious flaw with that plan that even I, not only not the Smartest Man in the Room, but completely untrained in finance and economics, noticed immediately: one receives a payment for the assets, but then forgoes the future earnings of said assets. Bernard Hickey explains it this morning:

But Mr Hickey, from financial website interest.co.nz, said that based on last year's earnings the four state-owned enterprises paid a dividend of 7.6 per cent, against the 5.5 per cent cost of new borrowing. "On the face of it the Government is a net loser by selling half of these state assets."


He's almost right - actually, on the face of it, we the New Zealand taxpayers are net losers by Key selling half these public assets.

So why is he doing it? He's throwing right-wingers a bone in the hopes of retaining at least some shred of credibility with them in an election year. He'll be well rewarded, and we'll get to pay for it. Funny, but that's often how ordinary people's relationships with Gods of Finance work out...

16 comments:

Anonymous said...

Macdoctor does the math better than Bernard.

http://www.macdoctor.co.nz/
"I think Hickey is confusing shareholder equity and the value of the company in a partial sell-down. For instance Meridian has about $5 billion of government equity but has a book value of $8.2 billion. Should that be a realistic value (and that is by no means certain), then that is the real amount upon which the government should be calculating dividend, because that is the amount of money they would receive in a total sale."

Simon said...

“Remember how chuffed everyone was that the reigns of govt were being taken over by John Key and Bill English”

Everyone was chuffed that Dear Leader was off to the UN. (Like fuck she was going to stuff around in NZ after nine years of running the country into the ground)

When Bill English buys the equivalent of NZ rail you might have a pt.

Adolf Fiinkensein said...

On one thing here, you are correct Milt. You are not the smartest man in the room.

Anon 8.03

Even macdocter has not got it quite right. The real amount is not book value but market value which rarely reflects book value.

In a market starved of high quality floats, the market value may well significantly exceed book value and THAT is the amount of capital against which the dividend needs to be assessed.

Inventory2 said...

Not that Phil Goff is throwing the left-wingers a bone with the tax-free income plan Milt ...

Psycho Milt said...

In a market starved of high quality floats, the market value may well significantly exceed book value...

Yeah, sure - was there ever a right-winger who didn't overplay the amount that selling public assets would bring in? One thing we have learned from experience is that right-wing govts sell low, left-wing govts buy high, and the long-suffering taxpayer takes it up the arse both ways. Key is merely opening a new round of what has become a traditional game.

Anonymous said...

"The real amount is not book value but market value which rarely reflects book value."

Hmm, I thought our SOEs had to revalue every year so book value is market value and not like a "depreciated Book value"?

The Gantt Guy said...

Milt, Key and English are irretrievably lost to right wingers. I know it's a small point, but you probably consider Adolf and Farrar to be "right wingers".

Let me start by saying I think the decision to allow private investment in these companies is a good one. Except that isn't what they've done. They've said they'll ask the treasury to do some numbers. Once they have those numbers, if they stack up, then maybe they'll think about listing. Unless a couple of unemployed actresses and a few smelly eco-mentalists decide to take a walk down Queen Street and dissuage them.

Incidentally, there are 2 things John Key could do to save himself in the minds of right wingers:
(1) beg The Don to come back and be Finance Minister,
(2) immediately cut impressive amounts of fat out of the spend, including closing down entire departments of the bureaucracy.

See, it's folly to sell the family car while you're still borrowing money to pay for Sky TV and a weekly visit to the Casino.

I know it's something you could never understand. As a leftie, you're brain-damaged. But the amount of money spent on welfare is simply embarrassing. Most of it is pork the communist lesbian used to buy the 2005 election and which Key & English are too frightened to roll back.

Additionally, much of the spending in education and health is mis-directed and poor quality. Better targetting of funding in these areas will ultimately lead to better outcomes. More money is not the problem, in fact more money may well *be* the problem.

Adolf Fiinkensein said...

Anon 8.51.

That may well be the case but until they are floated nobody really knows the true value. Surely you would put up a minority share at a decent premium over and above book value?

Milt 8.48

So the Labour administration who gave away a dozen or so SOEs at bargain basement prices was a 'right wing govt'?

JC said...

"and the long-suffering taxpayer takes it up the arse both ways."

Not with a half and half deal. This way you get rooted and sucked off at the same time.. so there's something there for everyone.

JC

David said...

Hickey is wrong with his figures, two of the SOEs paid special dividends by increasing their debt. The dividend was higher than the profit so not sustainable. Treasury have SOEs returning an average of 1% return on equity over the long term.

Psycho Milt said...

So the Labour administration who gave away a dozen or so SOEs at bargain basement prices was a 'right wing govt'?

Yes. Certainly more right-wing than the National Party of the time, which is why it cleaned up so many right-wing votes in 1987.

JC: I guess it's like at least this time they're doing us the courtesy of giving us a reach-around - it's a marginal improvement on previous shaftings, but still not something you really want to undergo.

Gantt Guy: you're the right-wing equivalent of all those lefty commenters saying that Labour doesn't count as a left-wing party because blah blah blah. To those not out on the fringes, the terminology's clear enough.

The Gantt Guy said...

Funny Milt, you proved my point with this gem:

"Yes. Certainly more right-wing than the National Party of the time, which is why it cleaned up so many right-wing votes in 1987."

The Labour Party of Lange and Douglas was more right-wing than the National Party of the time, and certainly more so than the current National Party.

Blair said...

Milt, and others, you miss the point.

You don't get the value of an asset sale off of a government balance sheet. Selling SOEs is not about governments making money, it is about individual citizens making money.

Yes it is true that governments do not know how to make money, only how to spend it. Yes it is true that they are unable to run a business as efficiently and with as much profit as the private sector. But again, helping the government is not the point of selling an SOE. The point is to allow private companies and individuals to use their initiative and provide goods and services to the public without the hinderance of government competition, which is usually unfair and therefore economically stifling.

A government could sell TVNZ for $1 and it would still be a good deal and benefit the economy. If every tv station in NZ was privately owned, the whole industry would be better off, generating more profit and creating more jobs. No, you sell government assets to help individuals, not to help the government.

libertyscott said...

Who relies on a single year of returns to base a decision of investment?

Hickey is grandstanding, it wouldn't keep you in a junior job in an investment bank. What is needed is to look at capital value and dividends likely over several years - the big thing missing out is the discipline of a share price to demonstrate the former.

Psycho Milt said...

The point is to allow private companies and individuals to use their initiative and provide goods and services to the public without the hinderance of government competition, which is usually unfair and therefore economically stifling.

In other words, the reason for doing it is ideological. This ideology is currently worth around 1-2% of the vote in NZ, so a govt basing policy on it deserves serious punishment at the polls.

What is needed is to look at capital value and dividends likely over several years - the big thing missing out is the discipline of a share price to demonstrate the former.

Even if we could get an accurate picture of the likely rate of return over the next few years, and it turned out to be a bit less than the interest on the debt, the bottom line remains that they'll be putting income-generating public assets into private (and, effectively, foreign) hands in order to continue with spending that Labour should never have initiated in the first place.

It's a bad idea for that reason alone, and a declaration of a complete lack of bollocks from both men. To add to that however, we have that other bottom line, that history has taught us right-wing govts sell low and Labour govts buy high. The voters know instinctively that they'll be ripped off when National sells shares in these assets, and they'll be ripped off when Labour eventually buys them back. In other words, politically it's also a bad move.

Blair said...

The point is to allow private companies and individuals to use their initiative and provide goods and services to the public without the hinderance of government competition, which is usually unfair and therefore economically stifling.

In other words, the reason for doing it is ideological.


So, I just explained that it makes people better off, and you say that's "ideological". So it's much more practical to have the government run things? What a load of bollocks and newspeak.