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Economic benefits of tax reform, savings outweigh SOE sales

Economic benefits of tax reform, savings outweigh asset sales: Treasury

By Paul McBeth

Jan. 28 (BusinessDesk) – The Treasury says full private ownership of state-owned companies would deliver less economic benefit than reforming the tax system and encouraging saving, but is in line with the government’s policy direction.

A Treasury think-piece written on Dec. 3 endorses commercial asset sales, as expected, though acknowledged the strength of the case would need to be weighed against public opinion. Full private ownership for all companies is likely to result in “moderate economic benefits” over the medium term, and more significant benefit could be derived from more tax reform and encouraging savings.

Still, embarking on partial privatisation would reinforce the government’s policy direction, in that it would apply tougher scrutiny of SOEs’ performances, release funds that could be applied elsewhere and improve investment in local capital markets.

“We think the case is particularly strong for ongoing tax reform, for example, but the case is comparatively much weaker for private ownership of the Crown’s commercial portfolio,” the think-piece said. “A risk of moving too far is loss of public support for ongoing reform or even policy reversal later through renationalisation.”

Earlier this week, Prime Minister John Key said the government is open to selling down up to half its holding in electricity retailers Meridian Energy Ltd., Genesis Energy Ltd., Mighty River Power Ltd., coal miner Solid Energy Ltd., and carrier Air New Zealand Ltd. That would free up about $7.8 billion of cash tied up in the companies, if the government sold down its holdings to just over half in each of SOEs.

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The Treasury report said selling assets would limit the amount of debt that needs to be raised for future capital expenditure, but would need substantial divestments. If the three electricity generators and Solid Energy were sold for some $13 billion, debt would be lower by about 6% of GDP, but if between 15% and 20% of MRP, Meridian and Genesis were sold, that would only cover one capital budget.

In a letter to Treasury Secretary John Whitehead, Finance Minister Bill English and SOE Minister Simon Power said the government will only extend the mixed-ownership model to the electricity retailers and Solid Energy and look at reducing its stake in Air NZ, as it tries to “reduce the rate of debt accumulation.” As at Nov. 30, the government’s net debt was $35.9 billion or 18.8% of gross domestic product.

“Only the four companies we have mentioned will be considered for the mixed ownership model already applying to Air New Zealand,” the ministers said. “However, as regards other Crown commercial entities, we continue to remain open to your advice on improving commercial arrangements with a view to enhancing the performance of the portfolio.”

The Treasury said it sees a case for a medium-term strategy involving a mixture of full sales in competitive markets where gains are high and concerns low, partial sales were residual concerns remain, and full ownership for those companies facing risks private investors aren’t willing to take on.

An option if put forward as an illustration was a 25% partial listing of one of more of the electricity retailers and Solid Energy, an issue of equity bonds in Kiwibank Ltd. to fund its growth and full sales of Kordia Group and minority share holdings in regional airports.


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