So the government has announced changes that have been pushed through parliament in order to ensure that “ministers will be able to block the sale overseas of any land or assets if it runs counter to the need to maintain New Zealand control of strategically important infrastructure on sensitive land“.
Now I’m not an expert on why or how we should maintain New Zealand control of strategically important infrastructure. Around the blogsphere, I see some people arguing against this proposal (here, here, here, and here) and people arguing for it (here and here). From all our special conversations about positive and normative economics we know that we cannot make a definitive conclusion with making some value judgments – however that shouldn’t stop me from describing some of the things I believe are pretty close to facts about this policy.
First lets us ask what the benefits for New Zealand from selling the asset are (as commentators seem to be uninterested in how this decision affects the welfare of other countries):
- Selling an asset creates funds that can be used.
- The new owners of an asset may have more efficient ways of running the company (better management practices etc), which would ceteris paribus (pretty much, as long as it doesn’t increase market power) increase consumer surplus.
- New owners may have benefits stemming from a number of attributes (economies of scope and/or scale, vertical integration). (Not applicable in AIA case, as its a pension fund from Canada buying it)
- Producer surplus is higher – as the local owners have to be willing to sell the asset in the first place, implying that the opportunity cost of selling the asset (which is keeping the asset) is of a lower value to the firm.
The costs come in the form of:
- Greater market power for the firm (doesn’t hold in the case of AIA).
- Loss of ‘social benefits’ from local ownership.
- The dividend payment that heads overseas from the asset.
As long as the business is sold for fair value we should be able to cross out benefit 1 and cost 3. Why? Well we get a capital inflow of $x for our asset, which can be used to buy assets overseas. If the two assets are valued equally then the expected yield should be the same (unless of course, one was expected to record a greater value of capital appreciation for some reason – but returns should ultimately be equalised).
Since benefit 3 and cost 1 don’t hold in the current case, the government should only intervene when cost 2 > benefit 2 and 4. What the hell am I talking about?
I’m pretty much saying that the ‘social benefit’ of local ownership must exceed the gain to current producers and consumers of this sale going through. Ignore all the crap about our current account deficit (although Bernard Hickey is exactly right when he says that this government posturing will increase interest rates, as it increases risk – I believe you could call this risk a social cost of the policy) and ask yourself if you think that your concept of social benefit from ownership of an airport exceeds the potential benefit to consumers and those that have the property right over the asset – as this is what the argument boils down to.
What could this ‘social benefit’ be? I’m not really sure. If you believe that stuff about local business owners investing more in their communities, or having a more altruistic utility function then that would be one. However this is a value judgment, and should be framed as one.
A more satisfactory social benefit may come from the relationship between government and its citizens – laws on locals may be more effective than laws on foreign owners.
Now I better say what I think. I don’t think that the social benefit exceeds the benefit to the owners of the airport, and the consumers of the airport – so I say let them sell. However, I haven’t gone through any finances or done any work so I don’t feel qualified to make a policy decision 😉