Wednesday, July 4, 2012

More on asset sales

I'm quoted in the Press's story on potential asset sales. Spot the minor transcription error from the email I'd sent! First comment to catch it wins the chocolate fish. Two letters are missing... somewhere.
There is a strong case for selling some Christchurch City Council assets, a Canterbury University economist says.
Dr Eric Crampton, a senior lecturer in finance and economics, said that if the council was not prepared to cut its expenditure on large capital projects such as the planned sports stadium and convention centre, it should look at selling assets that were more valuable when owned by the private sector.
''Lyttelton Port and Red Bus very plausibly fall into that kind of category,'' he  said.
''We oughtn't forget that only a few years ago the council thought that a private management company would be best placed to run Lyttelton Port.
''Bus routes in Christchurch are allocated between council-owned Red Bus and other operators, like Leopard, by competitive tender. It's pretty clear that we really need to have the council owning one of the companies.''

For other assets where the council might not want to give up control, like Orion, partial private ownership could help bring in external expertise while bringing in revenue.

''For other assets where efficiency gains from privatisation are limited, there's no strong case to be made between debt and asset sales. Both reduce the city's net asset base and constrain future ability to raise debt in case of seriously damaging future aftershocks,'' Crampton said.

Ultimately, whether the council or the private sector should control an asset depended on which was best placed to operate it.
Finding the two missing letters above is left as an exercise for the reader. [Update: Philip catches it. I'd said "unclear" rather than "clear" in the sentence: "It's pretty [un]clear that we really need to have the council owning one of the companies."] I'd also sent this paragraph, which didn't make the cut:
“It’s a bit of a shame that so much of the discourse around asset sales has focused on differences between dividend rates and the interest rate on Council borrowing. First, it’s harder to put a fair value on assets held by government because they’re not traded on the open market; the recent rather large reduction in the book value of KiwiRail points to some of these difficulties. Where we are less certain of the asset’s value, we have less confidence around the actual dividend rates. Further, where reported dividend payments include a lot of booked capital gain rather than actual cash payments, it’s not entirely a fair comparison with bond payments. But more fundamentally, ownership of assets comes both with risk and with ongoing maintenance liabilities; gaps between dividends paid by Council enterprises and interest on Council debt is largely explained by that the former is riskier.”
There is little point in keeping the "family silver" as a hedge against bad times if you're not willing to sell it when bad times hit. Still, cutting back on planned expenditures on a new stadium in excess of the insurance payout makes an awful lot more sense than either debt or asset sales.

9 comments:

  1. I'm guessing you said "It's pretty UNclear that we really need to have the council owning one of the companies"?

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  2. You win the imaginary prize!

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  3. What about
    ''We oughtn't forget that only a few years ago the council thought that a private management company would be best placed to run Lyttelton Port."
    There is no such word as" oughn't" surely Eric would have said we 'ought not' as in we 'ought not'
    sell assets, or the people will get very angry

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  4. Eric says:
    “It’s a bit of a shame that so much of the discourse around asset sales has focused on differences between dividend rates and the interest rate on Council borrowing. First, it’s harder to put a fair value on assets held by government because they’re not traded on the open market; the recent rather large reduction in the book value of KiwiRail points to some of these difficulties. Where we are less certain of the asset’s value, we have less confidence around the actual dividend rates. Further, where reported dividend payments include a lot of booked capital gain rather than actual cash payments, it’s not entirely a fair comparison with bond payments. But more fundamentally, ownership of assets comes both with risk and with ongoing maintenance liabilities; gaps between dividends paid by Council enterprises and interest on Council debt is largely explained by that the former is riskier.”


    so while I am at it, we ought not to believe that private companies or public stocks and shares give us any realistic valuation, in fact the opposite, so I will go for return rates rather than sales , lets keep it clean for the next generation, NZ and ChCh

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  5. note Eric, that your readers, and there are many, they have to read backwards, that is they have to read the most recent and then go down to retrieve its relevance if any , remove Disqusting

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  6. For council entities without traded shares, you have to guess at value. That isn't always easy. For stocks traded on the market, it's far easier - market participants give an aggregate estimate of total value. But think about how much money and effort goes into assessing the right IPO price for a firm going public - that same process is what's needed to get a fair valuation of SOEs. And without that kind of fair valuation, we don't really know what dividends rates are. We know what dividend payments are. But as a proportion of aggregate value it's less reliable. And where we look instead to the total of dividend payouts and asset appreciation as giving a better measure of aggregate performance of private firms, it's not obvious that that extends well into public companies where we have decided as a matter of policy that notional capital gains can never be realized by putting it to the market test.

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  7. I need to check whether that can be fixed with a setting within Disqus. I think it should be fixable.

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  8. http://www.merriam-webster.com/dictionary/oughtn't

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  9. Peter - you can choose the order in which you see comments. Hit "Discussion", above. You can order comments by "Best", "Newest", or "Oldest". The default is "Best", within which it seems to sort by newest first. But you can have it any way that makes you happy.

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As I randomly delete anonymous comments, please use a handle. Comments on older posts go into moderation; sorry if there are delays in hoisting your comment from the moderation pool.