Thinking straight on asset sales

As far as I  can tell, National only has one policy at the moment [Update:  When I wrote this on Wednesday morning this felt like the case – now I see they are talking about the ETS … I will get to that another time].  That is to sell down part of the governments stake in assets, and use that money to build schools.

Now, I hope that since they have no other policies they don’t intend to really do anything during the next three years.  For the sake of it, I’ll assume this is the case.

On the note of their policy, I have to say I have no real problem with asset sales as long as:

  1. The country has a good legal system (CHECK)
  2. The country has clear and consistent competition policy (CHECK)
  3. The asset is sold for at least fair value.

So, if they are going to do this we have to make sure there is a fair price.  Excellent. [Update:  Here is a good piece from Rob Salmond on why the price issue can be a difficult one]

Now, if this was the whole policy we could end there – but it isn’t.  They then want to invest this money into schools.

Is this really the best use of the funds?  Is the rate of return on new schools high enough to justify the sale of assets?  If New Zealand had an undersupply of school space then this could make sense to me – but I was under the impression that our schooling infrastructure was actually pretty good.  As a result, why the hell are the funds being invested there?


So when looking at National’s policy, we have to ask:

  1. Are they going to get a fair price
  2. Are they investing the funds in the right way.

Hopefully they can achieve the first criterion, but currently it doesn’t seem that they are really willing to meet the second criterion.  If National is just going to waste the funds that come in from assets sales I would prefer them to just not do it.

12 replies
  1. Rob Salmond
    Rob Salmond says:

    I think this is a good post, and a fair, reasonable way to assess the case for partial asset floats. Among your two criteria (1. fair price; 2. best use of the capital inflow), you appear most worried about 2. I see what you mean, but I think 1 is also a real problem when governments are the sellers. Here is a post on pundit where I explain that perspective:

    • Matt Nolan
      Matt Nolan says:


      Very true points – I’ll link to your piece above.

      My concern was more around the second issue because that was announced at the time – however, both issues are essential.


  2. Eric Crampton
    Eric Crampton says:

    If asset sales are a good idea, they ought be a good idea independently of the use to which the funds might be put. The two decisions ought to be separable.

    • Matt Nolan
      Matt Nolan says:

      You’d hope so.

      The way I see it – without any analysis there is an x% chance a policy will be bad.  They put two policies together, and the chance that the new one is bad is greater than 2x% – as they are already introducing arbitrarily political fiddling to the process.

      Of course, if x>50% this equation might not hold perfectly …

  3. Eric Crampton
    Eric Crampton says:

    I’m always suspicious of policies that tie together unrelated areas. Like, say, a tax on espresso to fund aid to the third world. If you oppose the tax, you must hate poor people. If you oppose partial asset sales, are you then against schools and fluffy bunnies and good happy things?

    And, heck, I generally favour asset sales. But total sales, not partial. 

  4. Bill
    Bill says:

    I don’t see it the same way Eric does. I think it’s a portfolio. We can invest in assets, or we can invest in schools (or roads or health or…). Whether it is a good idea to sell the assets depends on the potential return from other activities. It is also complicated by the idea that we might improve the rate of return on the remaining investment if we change the shareholding.

    • Seamus Hogan
      Seamus Hogan says:

      There are two reasons not to think of the two decisions as a portfolio. First, investing in schools, health, or whatever can be funded out of borrowing just as easily as from asset sales. The issue of whether the government’s net financial position is better with a portfolio of higher debt and higher ownership of equity (SOEs) is quite sepearte from whether that position should have more net debt coupled with social investment.

      Second, it is a huge mistake of falling into the trap of calling social expenditure “investment”. Yes, in principle, expenditures in social areas can produce a return in the future, but, useful expenditures will be on-going (e.g. better teachers), not a one-off and the uncertainty bounds aroudn the return are too great to warrant financing out of borrowing rather than taxation.

      My worry with National’s plan is that, in a silly attempt to make the asset sales more acceptable, they will put the money into bricks and mortar photo ops. Anyone with children at school knows that the most (only?) important determinant of a successful year is the quality of the teacher, not how nice the school hall is, how many computers the school has and whether there is broadband.

    • Eric Crampton
      Eric Crampton says:

      Treasury reckons the deadweight costs of income tax means projects have to provide benefits in excess of nominal cost of somewhere around 20%. So if the proposed projects pass cost-benefit already by more than a 1:1.2 ratio, then they’re separable from asset sales. I’d expect that it’s only where the deadweight costs of asset sales are less than those from raising revenue from tax or borrowing and where the proposed projects only just failed cost-benefit at the 1:1.2 ratio that you can make a strong link between the two. I’d be a bit surprised if that were the case.

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