Sunday, February 26, 2012

"Bill English? Mate, I'll Bill Anyone!"

In a recent speech to the Auckland Chamber of Commerce, Bill English laid down the gauntlet.

"Our political opponents need to honestly explain ... why it would be better to borrow this five to seven billion from overseas lenders at a time when the world is awash with debt and consequent risks. [rather than sell assets]."

I'm no Finance Minister (yet), but I think I'll have a crack at it.

What English is stating is that he'd prefer to sell $5-7 billion of assets rather than borrow $5-7 billion.

Leave aside the ever-changing numbers and estimates for a moment (and $2billion is a not inconsiderable variance), or the question as to what the money is actually going to go into (Key says hospitals and schools; we say it's paying in part for tax cuts), or the desirability of having core elements of important national infrastructure retained by New Zealand ... at its core, he's effectively saying it makes more financial sense to sell assets than to borrow.

So, let's do some number-crunching, shall we?

Treasury reportedly states that our assets on the chopping block have returned an average dividend of 14.5% over the last five years. 

Or, in plain terms, after a bit more than five years, we make more than we put into them.

So far, the only advantage of selling them now rather than waiting for them to deliver a steady and lucrative dividend is that we get a quick injection of cash now (or rather, over the next three years as we gradually privatize 'em) rather than having to wait half a decade for roughly the same value to accrue.

Leave aside for a moment that if we don't sell these assets we'll keep earning the dividend every year and thus stand to gain far more than the $5-7billion English is promising.

Instead, let's look at a direct comparison of how much it costs us to get this $5-7billion.

I've not been able to find direct information on the cost of crown borrowing (obviously my google-fu is weak), so I can't place the 14.5% p.a profit of retaining our assets next to a very low interest rate and say with mathematical certainty that "we're offsetting this borrowing cost completely and making a tidy profit"; but what I can do is point to another Bill English figure of a $100million p.a gap between the dividend we're going to make on these assets and the cost of borrowing the $5-7billion.

Let me rephrase that. By keeping these assets and by borrowing the $5-7billion, we're better off by $100million a year than we would be by selling the assets for a quick buck. And that's not even taking into account the longer term returns above and beyond the $5-7billion which we'd continue to reap if we kept 'em Kiwi.

Given his penchant for making up numbers favourable to whatever policy he's trying to push at the time, the actual amount could well be higher.

English had requested that his political opponents (of which I am a proud example) "honestly explain" why we should borrow rather than sell assets. Who'd have thought he'd be able to do it all by himself.


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Oh, p.s/addendum ... with what has to be a seriously unique talent for political doublethink, English also happened to say the following while trying to defend the $100million we'd be worse off by. 
"Would you be willing to increase the mortgage on your house to go and borrow the money to buy shares on mighty river power?" I'm assuming, given the context he raised it in, that the answer he expected was "No". 
Correct me if I'm wrong, but isn't this EXACTLY what Key expected all those "Mum & Dad" investors to do rather than putting money into proven revenue returners like property..?

2 comments:

  1. Well sussed, Curwen.

    With each passing day, the illogic of National's asset sales becomes more obvious. New Zealanders are right to oppose the sale of our power companies and Air NZ - the economic argument is a sham; "mum and dad" investors will miss out to corporate investors; and eventually our power prices will skyrocket.

    Bill English's comment, "Would you be willing to increase the mortgage on your house to go and borrow the money to buy shares on mighty river power?" may be an unintended slip on his part - but its a rare slip of truth from him.

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