Govt considering SOE sales

Bill English has been quoted as saying the Government is considering the sale of certain state owned enterprises in its next term. Apparently the Government are currently preparing an “investment statement” that will outline what it considers possible.

Currently a significant portion of Government capital is tied up in the SOEs, around $40 billion dollars (around four times the size of the largest projected Government deficit).

SOEs perform, as a class, very poorly. Recent reports suggest that in the last financial year they returned 1.5% on equity. This is below the risk free rate of return.

Such poor allocation has real costs to the New Zealand economy. The opportunity cost of maintaining investment in such low returning assets (as a whole) effectively amounts to taxpayer resources being wasted.

It is therefore very worthwhile that the Government looks at its investments and considers whether SOEs might be better placed in the private sector’s hands.

  • “SOEs perform, as a class, very poorly. Recent reports suggest that in the last financial year they returned 1.5% on equity. This is below the risk free rate of return.

    – ah yes, made all the worse because the last financial year was one of bumper growth in the private sector. Oh, hang on…

  • The SOEs consistently perform poorly in terms on ROI, nothing new there.

  • “The SOEs consistently perform poorly in terms on ROI, nothing new there.”

    1. Consistently perform worse than equivalent private firms in similar markets who are not simply extorting rents from natural monopolies? Really? Evidence?

    2. And if 1 (above) is true do you also have evidence that the poor ROIs in the case of current day NZ SOEs are worse due to efficiency issues or simply because the government has mandated low profits.

    BTW – your avatar is offensive. You should consider changing it.

  • 1. Given a lot of the Government’s own businesses operate in areas that might be considered quite far from the ‘perfect competition’ ideal, I’m not sure your point holds. I will look for more evidence on SOE returns on equity nonetheless, I am genuinely interested in seeking out more comparisons and was hoping this post might bring some to light.

    2. Irrespective of whether the Government has “mandated low profits” or not, it is still a waste of resources.

    And you should consider not being so sensitive.

  • Some (limited) evidence here that the ROI has increased to 4.4% recently in calendar year 2009:

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10647084

  • StephenR

    @goonix

    How is the evidence limited?

  • @StephenR
    It is a quote from a politician reported by a newspaper. I mean it is not a peer-reviewed study. 😛

  • Some (limited) evidence here that the ROI has increased to 4.4% recently in calendar year 2009

    Thanks for having a look for evidence.

    Recall that the original point in your post was that:

    It is therefore very worthwhile that the Government looks at its investments and considers whether SOEs might be better placed in the private sector’s hands.

    The fact that the aptly named Mr Power has managed to obtain higher rates of return from SOEs actually undercuts this point; it’s evidence that governments can increase rates of return if they so desire (one of my original points). Or, at least, it would be evidence if we could disentangle Mr Power’s achievements from global economic trends.

    Irrespective of whether the Government has “mandated low profits” or not, it is still a waste of resources.

    No it’s a socialisation of resources. Weather it’s a waste or not depends on a much more complicated interaction of:

    a. The direct impact on people’s welfare of power prices (to use the current example).
    b. The actual (as opposed to stylised and assumed) flow of prices and rents through an economy.
    c. Questions of political economy and what a government can actually achieve by means of tax and transfer.

    And you should consider not being so sensitive.

    I’m not particularly sensitive, I simply think that comparing Helen Clark to Adolf Hitler is so ludicrously hyperbolic that it is not only insulting to her but also trivialising of the real crimes of the Nazi regime.

    Why would you want an avatar that did this?

    cheers

    Terence

  • @terence
    I agree that it is very desirable that SOEs have performed better recently than in the past. That does not mean that sales shouldn’t be considered, nonetheless.

    Relatively lower rates of return on SOEs are a waste of GOVERNMENT resources (perhaps I should have been clearer as to incidence). And if SOEs are being used as a redistribution tool then arguably it is a waste of the NZ ECONOMY’S resources, as there are more efficient tools to redistribute through. e.g. transfers via benefits.

    Finally, thanks for your continuing concern w.r.t my avatar.

  • Goonix,

    Thanks for your reply.

    Re. the waste of govt resources for those SOEs that exist as natural monopolies remember that optimal profit rates are not maximum possible profit rates. If they were then govt. would just be extracting a rent no different from a private firm.

    Because optimal rates are not maximum possible rates figuring out exactly what the right rate of return is will be very tricky. However, let’s assume that the rate of return for SOE X is less than the optimal rate, and that this is a result of government policy not inefficiency. This is only a wasteful policy if: tax and transfer does work better (i.e. if it doesn’t have problems of it’s own) and if political economy issues aren’t constraining the government from increasing tax and transfer.

    Otherwise, in a second best world, using SOE profit margins as a social policy might just be as good as can be done.

  • @terence

    That is quite a tight set of circumstances: IF an SOE is a natural monopoly AND government policy (as opposed to inefficiency) is responsible for relatively low returns on investment AND tax and transfer is not superior for redistribution (for either economic or political reasons) THEN using SOEs to redistribute might be optimal.

    I concede that there may be instances where privatisation is not the optimal option. But that doesn’t mean that the idea of privatisation per se should be cast aside. Indeed that is the initial point I was making, that the Government should consider it as an option.

  • One problem I have with your logic terrance is that a lower rate of return can come from either being (prodcutively) inefficent or from charging low prices. I don’t think we have a way of reliable way of knowing which is happening so I don’t personally feel uncomfortable seeing SOE’s having a low ROI…

  • And I realise you have probably addressed this, I just don’t have time to read all the comments properly right now, lol,

  • http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10647186

    “Kiwibank’s profit as a percentage of average assets was 0.6 per cent in 2009”

  • goonix:

    In summary…

    1. I don’t think SOE’s should never be sold off. You don’t think they should always be.
    2. Neither of us has sufficient evidence to categorically state whether apparent low rates of return are a result of: the nature of the specific industry; broader economic trends; government mandates; or inefficiency. And our disagreement hinges around our beliefs regarding the respective likelihood of these explanations.
    3. You think my set of circumstances in comment #10 is unlikely; I think it’s quite likely.

    Agnito:

    yip – that was one of the original points of contention; although it soon got lost in the hurley-burley of battle.