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mainland press

THURSDAY MAy 24 2012

Private v public ownership, which is best? Mainland Press asked Dr Eric Crampton, senior lecturer in economics at the University of Canterbury what he thought of Government suggestions that Christchurch city-owned assets should be sold. Here are his thoughts. reconstruction. The “short-term vs long-term” aspect of selling council-owned assets should be viewed similarly. What really matters is whether that asset is better owned by council or better owned privately. Some assets are best owned publicly; Orion, the lines company, should probably remain majority-owned by local council. A fully privatised power lines company would wind up being subject to public monopoly regulations that would mean there’s little gain from having it in private as compared to public ownership; private owners then would be willing to pay council just enough for the asset to offset council’s loss of dividends. So there isn’t a lot of difference between

WHILE it’s true that many council assets pay dividends, it’s also true that they would pay dividends to a private owner. And, a private owner expecting to earn large returns from an asset will be willing to pay more for that asset. So when a dividendproducing asset is shifted from public ownership to private ownership, council is really compensated for the loss of the future dividends by the current lump sum payment. Is it “short-term thinking” when the Government sells bonds, getting a pile of money now in exchange for a flow of debt repayments that continue over time? Probably not, and especially when we’re selling bonds to pay for things like earthquake

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council’s selling some shares in Orion and council’s selling some bonds, so long as people are willing to buy debt from council. But other assets could well fare better in private management. Last I’d checked, council owned more than three-quarters of Lyttelton Port of Christchurch; there’s reasonable reason to expect not only that the port would fare better privately but also that you’d get a decent price for it with an insurance-funded refurbishing of facilities. Standard economic theory says that you should pay for things like earthquake recovery through a mix of debt, reduced current expenditures on non-earthquake activities, and future tax increases. Selling off current assets like the port that can plausibly be better managed privately than publicly can make even more sense than taking on current debt. Tax increases like those currently proposed make sense if council is having a hard time raising money in the debt markets and doesn’t

have assets like the port, or Red Bus, that could be sold off entirely. But council does have those Dr Eric Crampton assets. Finally, we also have to think about the uses to which any revenues from either asset sales or tax increases are put. I’m amazed that council is considering taxing us to fund expensive stadium options so we’re better able to host international test matches; their priorities are perhaps a bit different from mine. While it makes sense to sell off assets like the port to help rebuild our roads and sewers, if we sold off the port to put a roof on a stadium, a hundred economists around the country would have to go to the emergency department for “banging-head-on-desk-related” injuries.

From the editor

Chris Tobin

Hanging on to the family silver Christchurch Mayor Bob Parker has come out saying Prime Minister John Key and Local Government Minister David Carter should back off in pressuring the city to sell shares in its assets to fund the city rebuild. Mr Parker believes the council could fund the recovery without resorting to asset sales. He considers the council-owned assets are well managed and generate significant revenue for the city. The concern for ratepayers is that with the high expense of a massive rebuild, there could be a significant rise in what they will have to pay. Yet, last week Cr Helen Broughton said the city’s rates were 15 per cent lower than would be the case due to the revenue return from the assets. One can presume that revenue from the assets would continue to act as a buffer to any possible spiralling rates increase.

Christchurch has an enviable list of cityowned assets. Christchurch City Holdings, the city’s company, owns 89.3 percent of power network Orion, 75 percent of Christchurch International Airport (the remaining 25 percent by government), 79.3 percent of the Lyttelton Port Company and all of City Care, Red Bus, Enable Services and EcoCentral. Besides Mr Key and Mr Carter, there is a strong lobby within the city, among them Peter Townsend, chief executive of the Canterbury Employers Chamber of Commerce, who say the Government is talking commonsense on the matter. It might be commonsense for the Government, but is it commonsense for this city? Flogging off the family silver is often employed as a quick-fix solution to an immediate problem. As time rolls on, it is usually regretted.

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Mainland Press 75  

Mainland Press Issue 75

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