An Alternative Asset Sales Policy

Budget 2011 is only two days away and with an expected deficit of $17 billion there is going to be a large debate around government revenues and expenditures.  Earlier indications are that the Government is going to reduce expenditure on Working For Families and Kiwisaver and put their trust in an improving growth rate to restore the accounts to surplus over the next few years.  Central to this return to surplus will be a managed sell-down of the Government’s State Owned Enterprises portfolio.  I am broadly in favour of asset sales, although my approach would be entirely different from how a second-term National Government would approach the issue.

The big downside of running large deficits is the need to borrow more and more money, placing a huge burden on future taxpayers.  With our personal finances we are told to “save for a rainy day” and ensure that we have enough cash reserves or investments to cover any deficits (loss of income) that arise. During the early 2000’s, the Government operated large surpluses and, resisting the temptation to return those surpluses to taxpayers in the form of tax cuts, decided to invest for our future in the Cullen Superannuation Fund.  This was both inspired and foolish.  The Fund sought to address our future superannuation crisis but failed to provide for any short-term deficits.

The problem I have with the Cullen Fund is that it was the sole beneficiary of the surpluses of last decade.  It locked away a huge sum of money for an entire generation.  A better approach would have been to invest half of the surplus into the Cullen Fund and place the other half in a general investment fund which could then be used to better manage our way through periods of deficit such as like we face today.

So how does all this relate to asset sales? And, more specifically, where is the Maori interest in all this? This is where my alternative approach come in.

The way I see it, there are two principles to uphold with any asset sale policy. First, the asset remains in New Zealand ownership and, second, the Government receives a fair market price for the asset and can then use that income to either reduce the deficit or invest in infrastructure. In order to achieve both these principles, my proposal is that any SOE ear-marked for partial sale is offered for sale to the Cullen Superannuation Fund and interested Iwi only.

Under this approach, the asset remains in New Zealand ownership and continues to operate as a productive asset for New Zealand taxpayers, with the dividends being paid out to the Cullen Fund and Iwi instead of the Government. Over time, a greater percentage of each SOE can be sold to the Cullen Fund and Iwi (especially as more Iwi start to receive their settlement payouts).

The Government benefits in that it can realise the value tied up in SOE’s and use the proceeds from sale for investment in infrastructure or general deficit reduction.  This approach allows for the vast resources of the Cullen Fund to be employed in relieving the effects of running a large deficit without destroying the value of the Fund.  In effect, foreign assets could be sold to fund the purchase of the SOE’s which will maintain the value of the fund and provide for a solid dividend stream into the future.  This way, the Government benefits in both the short-term (through cash received from the sale) and in the long-term (dividends used to offset future superannuation payments).

How does this benefit Maori? It allows Iwi to invest into generally well-performing and long-term stable companies and reduces the risk involved in investing tribal money. Given the recent financial performance of many of the SOE’s, such investment will provide for a steady income stream in the form of dividend payments.  This approach also allows Maori to have a greater say in the operation of important New Zealand companies – especially in relation to the big power companies whose activities can have a big impact on the environment.  Many Iwi are interested in investing in SOE’s and creating a deeper economic relationship with the Government.  This is one way towards achieving that.

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