THE PRESS SATURDAY, MARCH 14, 1987. The assets of corporations

Press, 14 March 1987, Page 20

THE PRESS SATURDAY, MARCH 14, 1987. The assets of corporations

An argument being advanced by some members of the National Party — that the sale of the assets of Government departments to State-owned enterprises will make New Zealand taxpayers pay twice for the same assets — is a beguiling one. The new Stateowned enterprises come into existence on April land assets are being valued and negotiated now. These assets include buildings, dams, forests, and a host of other things. Those National members of Parliament who reckon that taxpayers are being sold their own assets say that the assets have been acquired over a long period from taxpayer money. These will become the assets of the new corporations which will have to pay for them by charging the taxpayer, probably at a high rate, for the services provide. The argument needs some sorting out. Two matters are involved. One is the sale of the assets to the new corporations; the other the charges for the services supplied. The second is the easier to grasp immediately. The State trading departments, or sections of departments, charge now for the goods or services supplied. People pay for coal from State Coal and for electricity from the Ministry of Energy. The fact that the dams supplying electricity were built by taxpayer money, or that coalmines were bought by the Government, does not mean that the taxpayer gets electricity or coal free, as a glance at recent electricity bills will confirm. Hence there is no reason for believing that whether the asset is owned directly by the Government, through a department, or by a corporation, the product will be delivered to the consumer without charge. The other aspect is less obvious. The ownership of the assets is being transferred to the corporations. To pay for these assets the new corporations will make two transactions. One is to issue shares to the Government and the other is to pay cash. The cash will come from borrowing. The cash flow from trading is likely to be used for operating costs. The Government will itself determine the ratio of debt to equity, that is the value of the shares held by the Government. The debt-equity ratio will be arrived at by looking at the debt-equity ratio of similar businesses.

The equity held by the Government in the new corporations presents no real problems and no charge of selling the taxpayers their own assets can be sustained. It amounts, in effect, to a book transfer. Instead of the trading arm of a government department being a formal part of the Government, the new corporation will be foramally owned by the Government. If the new relationship were expressed in terms of company structure the new corporations would be wholly-owned subsidiaries of the Government.

The debt content of the purchase of the assets is not quite so straightforward. If a new corporation borrows heavily to buy the assets, then an argument could be put forward that it would not hesitate to put up prices to recover those costs. If this were to happen, the impression might be created that the consumer is paying for the asset twice. However, there are a number of catches in that line of thinking. One is that the Government has moved already to make the trading arms of the Government charge prices which not only cover costs, but cover debt costs and depreciation of assets too. The assets, in fact, have been valued already by the Government departments. The valuations now being done will be those on which the new corporations will base their operations and may be higher or lower than the valuations already made. If higher valuations result, possibly charges will be increased; if lower, then the charges already being made may be too high.

Another catch lies in the fact that,

although the assets are owned by the taxpayer, some have not been fully paid for and were financed either by internal or external borrowing. The Government has to service both the external debt and the internal debt. The payment by the corporations for the assets, and the dividends that the Government in its optimism believes that the corporations will pay, should contribute in some way to the lowering of the official national debt. The forcing of the corporations to put their trading on a sound financial basis should also avert unwise investment decisions. In theory at least, there should be no double payment for the same asset.

The sale of the assets by the Government to a corporation owned by the Government may seem strange in itself. The Government’s view is that this will bring home to the corporations that they have to use their resource wisely. The whole thrust will make the managers more accountable and that unwise investment decisions which become a charge against the taxpayer will be avoided. There are undoubted dangers in this whole approach, but they are not those of paying for the same assets twice. A number of countries have government corporations that enjoy monopolies in their field of activity. The experience is usually that the corporation pushes prices high. The Government believes that it has already required the trading departments to price their goods or services appropriately, but there is certainly room for wondering whether postal charges or electricity charges, for instance, needed to be increased to the extent that they have. The new corporations should not be starved of cash flow. Perhaps the charges were justified. The Government’s accounting systems for decades have obscured 3hosts of factors.

The new corporations will be borrowing heavily. If they all started borrowing at once at the beginning of next month, the interest rates which resulted would make today’s interest rates appear paltry. The Government pains to manage the timing of the borrowing and will, for a period, act as banker to the corporations. But what if the corporations decide to borrow off-shore? This would add frighteningly to the already worrying total overseas debt of the country. This is a serious danger as each new enterprise seeks to consolidate its own position and believes that it can service its own debt. That ability to service debt will depend on the over-all economic health of the country. The consideration of the sale of part of the Manapouri Power Station to Comalco will be seen by many as a portent of things to come. If the new enterprises need to meet certain objectives then they will sell an asset or two. The result of all this might be the alienation of some of the country’s major resources from the citizens of the country.

The whole move to State-owned enterprises is an effort to make sure that the resources of the country are used to the best advantage. It will have advantages in that it will be easier to see where money came from and where it is going to. Whether the establishment of the State-owned enterprises on such a scale, and with such an emphasis on conducting their affairs as other businesses do, was necessary is a moot question. More rigorous accounting throughout the years might have satisfied many of the needs which now abound. The Government, and in particular the Minister of Finance, Mr Douglas, are determined that the type of investment decisions made under the Muldoon Government will never be repeated. Part of the motivation for the present moves would seem to arise out of this. But there are dangers in the path now being taken. These could be as serious in their way as the ills they are meant to remedy. Great care will have to be taken to avoid them.