A fair price for asset sales

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Matt has posted about asset sales and believes that they’re a good idea as long as the government gets a fair price. He seems to be saying that the government’s decision to sell assets should be the same as a private company’s. Only the government isn’t a private company, so the costs and benefits to be weighed are a little different.

To begin with, once the government has committed to asset sales it is politically committed to selling. That puts it at a disadvantage relative to potential buyers; one that they will be all to happy to take advantage of, as Rob Salmond has recently discussed. The fact is that government asset sales are a political manoeuvre, not a commercial decision, and that puts the government in a weak bargaining position with whoever offers to buy the assets. That’s one of the reasons why assets always seem to be sold at a low price, relative to their commercial worth.

So, if governments struggle to extract a good price for their assets, why sell them at all? The late Roger Kerr had an excellent series on his blog in which he detailed some of those reasons. The main two are that

  • Asset ownership is risky and the costs of that risk fall largely on those who depend on the government for their livelihood; and,
  • Privately owned companies tend to be run more efficiently and profitably

The main objection to asset sales is usually not on financial grounds but equitable ones: selling the assets transfers the future revenues from the state to a small number of private citizens. Now, if the assets were sold at a fair price that would not be an issue, as Matt notes. However, not only are they likely to be sold below their real value, but the additional profits realised by a privately owned company certainly accrue to only the owners of the equity. On the one hand we might say that is fair because they have, through their good business sense/ruthlessness [delete as preferred], generated that increased value. If they have generated it and paid their taxes then what claim do taxpayers now have to it? On the other hand, some will say that those people should not profit from taking advantage of the Crown’s weak bargaining power. In the latter case, one could either opt to tax the returns or design an ingenious contract by which the Crown was fairly compensated for their weak bargaining power. The extent to which you think that is possible probably determines your support or opposition to the sale of state assets — other than ‘strategic assets’, whatever they may be.

  • http://www.tvhe.co.nz Matt Nolan

    Yes.

    And there could be potential competition issues that could favour a body with public ownership.  Or the good that is being provided may be viewed as a “need”, and so government may want to be involved to ensure security of supply.  We could argue for private ownership in these cases as well – but we still have a roll for government.

    When I said fair price I was using a catchall term to encapsulate all the issues that exist on terms of the price and conditions of selling the asset.  The goal of my post was to look at the other side – namely that where the money is spent is also an important issue.

    • http://www.tvhe.co.nz rauparaha

      I know; I saw your post and wanted to talk about the other side of it a little. I don’t think we disagree.

  • http://offsettingbehaviour.blogspot.com Eric Crampton

    How is the government any more committed than a company that announces it’s going to run an IPO? I’m not seeing the bargaining power issue unless the government wants to sell the whole thing to a single buyer, and where there are only a couple potential buyers.

    • http://www.tvhe.co.nz Matt Nolan

      Isn’t one of the main points the fact that the people in power value selling the asset quickly on the grounds that it makes them look like a good manager – perverse incentives are rife in politics after all.

      Of course, if that is the issue then make the valuation and bargaining process transparent – and have it performed by an objective body who has a reputation for setting a good starting point on asset valuation (so not Goldman Sachs ;) ).

  • Seamus Hogan

    I’m with Eric on this one. Isn’t it a good political strategy to put out 40% ownership like an IPO, with a reserve price that guarantees a reasonable but not overly reasonable deal for the government. I would be surprised if there were zero uptake on the offering at such a price, and if there was less than a full uptake, the government would be able to demonstrate their commitment to organising their asset portfolio to maximise the benefit to taxpayers.

  • Rob Salmond

    Eric / Seamus:
    There is large political advantage to governments who run oversubscribed floats, because it makes their policy look popular Throwing a party with a line out the door looks better than throwing a party and having empty chairs. (I understand your point about a potential advantage of being seen to run an effective asset management strategy, but ask yourself which of those stories is easier to cut into a 2 minute TV news item…)
    There is also large political advantage to having the shares go up in value shortly after the float dates, so the investors feel rich at a time when they remember that it was the government that gave them the opportunity. Both those things lead governments to underprice their assets even when selling via an IPO rather than a large deal with one buyer. See my post that James linked to above for more on this.

    • Kimble

      Yep, those guys who are underpricing their assets for personal/political gain are definitely the ones we want in charge of those assets. What else are they willing to do for a boost in the polls?

      Perhaps the underpricing is actually finding the correct price, as in the value of the thing if it is held by owners without the commercial incentive? 

      • Rob Salmond

        Yeah, right on Kimble! Those idiot politicians didn’t even set up those commercial enterprises at arm’s length specifically to try and prevent that kind of meddling, or anything. Wait, they did?! And we have some of the most efficient SOEs in the world as a result?! Huh.
        Anyway, who was the last politician to consider meddling in an SOE for political gain? Oh, it was that commercial neophyte John Key with his great Coro St timeslot gambit.
        And nice try with the Jedi mind trick at the end, but these really are the droids I was looking for.

        • Kimble

          There you go trying to reassure us with past behaviour, when what we are worried about is the future.

          You have said yourself that the motivations of politicians will distort the price received for the assets. But for some reason the influence of those motivations stops at the boundary of asset sales and could never be found in the future operation of SOEs,

          Oh, unless it is John Key. Who is the devil. 

        • http://www.tvhe.co.nz Matt Nolan

          Kimble has a point that public choice theory also suggests that the scope and role of government will be inappropriate – as a result the net argument against/for asset sales is cloudier in this type of context.

          Which is why the solution is to increase transparency and accountability where possible, and then see what policies fall out.

        • Rob Salmond

          Yes, Kimble, yes. Imagine the lunacy of using the past to help us understand the future, when there is speculation and supposition to rely on instead. I remember that great saying supporting your point here: He who does not learn the lessons of history is bound to, er, be right about the future. Yes, that’s it.
          And yes, the influence of politicians over asset sales prices, where they are the mainline decision makers, is greater than their influence over power prices, airline tickets, and so on, where they are not. Would you like an organisational chart to help you understand this?
          And it is good to see your famously blinkered sense of humour is still with you. Any jokes about right-leaning politicians CANNOT POSSIBLY BE JOKES, and must be taken entirely seriously. Because left-leaning people are pathalogically incapable of levity. Good-o.

    • Seamus Hogan

      Rob,

      I don’t pretend to be an expert in politician perceptions of voter perceptions of policies, but my sense is that John Key is very attuned to the median voter. And I suspect that the median voter is much more likely to be throwing around the “selling the family silver” cliche than to be a mum-and-pop investor looking to buy the family silver and feeling gratitude for a healthy capital gain after the event

    • http://www.tvhe.co.nz rauparaha

      Does the government’s commitment to sell within an electoral cycle not prevent it from choosing to sell when the market is most favourable? I would have thought that would slightly reduce the expected price. In addition, this government appears to prefer to sell to domestically, which may reduce the price relative to selling in the international market.

      In any case, there must be empirical evidence on such sales. Does anyone know what it says?

      • http://www.tvhe.co.nz goonix

        Isn’t that a bit like saying a commercial entity may be forced to sell its assets at a bad time due to the economic cycle and therefore might not realise the best return possible? e.g. Terry currently flooding the Wellington apartment market. 

        • http://www.tvhe.co.nz rauparaha

          As in “a bad idea that you would never do unless you were forced to”? Yes.

        • http://www.tvhe.co.nz Matt Nolan

          Are you suggesting I should buy an apartment?

  • Kimble

    Damn this 4 reply limit!

    “Imagine the lunacy of using the past to help us understand the future, when there is speculation and supposition to rely on instead.”

    Using the past to help understand the future is one thing. Expecting something not to happen in the future simply because it hasnt happened in the past is another.

    “And yes, the influence of politicians over asset sales prices, where they are the mainline decision makers, is greater than their influence over power prices, airline tickets, and so on, where they are not. Would you like an organisational chart to help you understand this?”

    Oh no, I understand it. I also understand that an asset sale is a one-time event, while management is on-going. Which would give political motivation one opportunity  to influence asset sales, but an infinite number of opportunities to influence management.
    “And it is good to see your famously blinkered sense of humour is still with you.”

    You tell a joke so bad that it is unrecognisable as a joke, and that is MY fault?

    Pardon me for taking your unprompted, confused reference to John Key to be an indication of obsessive partisanship.