Matt Nolan

Bleg: BERL’s report on asset sales

/19 Comments/in /by

From this news release I can’t make heads or tails of what was really going on in the BERL report on partial asset sales, which is a pity because I would like to read what they put down – and hopefully learn a bit more about what is going on.

Does anyone have any idea where this report is?

Update:  Report on the Green’s site.  Eric Crampton, along with links from all over Offsetting Behaviour.

  • Brad

    • Cheers – feel free to comment on it here if you like as well.  I am a wee ways off reading it yet given other urgent tasks.

  • I’m glad I’m not the only one. I read the news release as well and couldn’t follow it either. Do we have yet another “BERL Report” on our hands? 🙁

    • Miguel Sanchez

      From a quick skim, maybe.  The thing that leaps out is their assumption that all of the funds raised from asset sales are ploughed back into other assets, i.e. debt is unchanged and spending is $5-7bn higher than the status quo.  It’s not that the analysis that flows from this is obviously wrong (though it could be – need to look closer), it’s just that as far as I recall this is not what the government is proposing.

      • From my read I get the same impression – the matter of the “price” received doesn’t seem entirely clear.  Was disappointed that changing the risk profile of assets also wasn’t mentioned.

        However, from what I’ve read the explicit assumptions seem fair enough, and the conclusion is not at all surprising.  So those are good things.  The newspaper article makes even less sense to me now though, maybe I’m overtired 😉

        • Do read the explicit assumptions again. They show that asset sales hurt net foreign debt by ignoring that foreigners do pay a bit for the assets in the first place, then assuming that while foreigners can buy stocks in former SOEs, the alternative of debt issuance can be constrained to domestic capital providers.

          Whole thing’s question-begging.

          Further, I’m pretty sure that the gap between SOE dividend rates and govt’s borrowing costs is much smaller than BERL is playing. Are the SOEs they’re putting up for mixed ownership really earning dividend rates four percentage points higher than the government’s current borrowing costs? 

      • Andrew R

        The assumption made regarding funds being put back in other investments is merely using the what the government says is one of the reasons for the partial sales.  So it is unreasonable to criticise BERL for running an analysis based on what the government actually says it going to do.  

        • Andrew R

          Thinking about it more I am convinced that your comments on the BERL report are comments on a BERL report that doesn’t exist.  The report is a critique of the government reasons (given in budget policy statement) for the partial sale of these SOEs.  Your criticism is that the full economic case for and against partial privitisation is not given by BERL.  You are trying to use oranges to condemn apples.
          … And ignoring the inability of private markets to provide strategic energy planning on the way through, which is in my view the strongest point against privitising energy soes; indeed it is why they should be recombined into one.

        • Kimble

          First you say BERL is just using what National has proposed. Then you ignore what National has proposed, which ISNT selling off controlling interests.

          If your strongest point is based on dishonesty about the proposal, forgive me if I dont give you the benefit of the doubt on your next strongest and weaker.

        • AndrewR: I’m not in favour of partial sales of the power companies. But BERL’s argument against it is pretty cruddy.

  • One thing I don’t get is this from page 11:

    The intention of the current asset sales programme revolves around four stated reasons, or 
    expected benefits.  These benefits, as listed in the Budget Policy Statement 2012, are:
     Freeing up capital for the Government to invest in other public assets, without having to 
    borrow to do so.
     Improving the pool of investments available to New Zealand investors and deepening the 
    capital markets.
     Allowing mixed ownership companies to access capital and grow without depending 
    entirely on the Government.
     Allowing for greater external oversight, which places sharper discipline and more 
    transparency on a company’s performance.
    But isn’t the reason for asset sales is to improve efficiency? Don’t we want assets in the hands of whoever will use them the best?

    • They suggest that as a potential benefit later on.

      I’d also note that it isn’t clear whether selling a minority stake has any impact on efficiency – since the controlling stake is still with government.  Tbh, I wouldn’t know because I haven’t looked into it, but I just can’t see how there could be much efficiency gain relative to a full privatisation – and given that the govt is putting in place a partial one, it makes sense that that is what they are investigating right.

      • “I’d also note that it isn’t clear whether selling a minority stake has any impact on efficiency – since the controlling stake is still with government.”

        I agree with you here. This is one good reason or note liking the partial sale route. But the Greens and BERL don’t seem to be making it.

  • There are lots of problems with the report. I caught some of them on a half-hour read (noted at Offsetting); Paul’s catching more. 

    If you assume that the new investments yield the same returns as the old investments, but only after a time-to-build delay, then it’s trivial to show that privatization only buys you a delay in the flow of a dividend stream. That’s what they did. If you assume that shares trade internationally while bonds can only be purchased domestically while ignoring that international money flows in to compensate you for the later outflows, it’s also trivially easy to show that asset sales hurt the external debt balance. I’d say both of those are question-begging; BERL might either disagree with me or, as they have before, conclude that I must support murder because I disagree with their analysis.

    • I don’t disagree that the results are trivial and from the assumptions – when you assume that you are swapping an asset with a NPV of X for one with a NPV of Y where X>Y, and you assume that spending is constant, there is going to be a larger hole in the accounts.

      But I have no problem with trivial models as long as the assumptions are transparent, and the model is merely showing a simplified version of something that does exist in reality.  Now, we may believe that there are missing other important “core” elements of the justification for asset sales in this release, or that they are stretching the results of a trivial model too far – but the idea that the result is trivial is not, IMO, a valid criticism. 

      • Dude, they said that it hurts NZ’s external debt on the basis of an assumption that foreigners can buy shares but debt would only be held domestically, while ignoring that foreign purchases also bring an up-front inflow of cash. 

        • I didn’t say I agreed with everything in it, that is one of the points I was relatively uncomfortable with.  I was just pointing out that the triviality of the result doesn’t make a result bad.

  • Kimble

    Whether it is good or bad will depend on how the Greens end up using it.

    Given the Greens history in these things, I suspect the report will be used to generate a greater amount of misinformed opposition to asset sales, with the Greens running the line “even economists say that asset sales are bad”.

    How much responsibility should BERL carry for how they KNOW the report will be (mis)used? 

    • I think Adrian Slack answered that question here, two years ago, in a comment that motivated me to spend a month an a half reverse engineering their alcohol cost study. Something like “we bear no responsibility for our product after it’s been handed to the client.”