FIF beats borrowing for new assets

National has always said that proceeds from the mixed ownership model of state assets would be used to fund different ones to reduce the need to borrow.

John Key’s announcement that the proceeds from the sale of a minority share in a few of the many assets owned by the state will go into a Future Investment Fund confirms that and ensures the money won’t be lost in the Consolidated Fund where it could easily be frittered away.

“A National-led Government will use the $5-$7 billion proceeds of the mixed-ownership model to set up a Future Investment Fund to buy new productive infrastructure for New Zealanders.

“The first priority will be putting $1 billion into modernising and transforming New Zealand schools over the next five years.

“The environment in which teachers teach, and kids learn, is hugely important to their future. We want New Zealand children studying in modern classrooms that meet their learning needs and let them use the most up-to-date technology.

“That’s a crucial component in lifting achievement, which in turn is vital to building a faster growing economy with more exports and more real jobs.

“As things stand now, the existing money for school building projects will be needed simply to maintain the existing school network and to help address health and safety issues like earthquake proofing and leaky buildings.

“The mixed ownership model will allow us to increase the total amount spent on school building projects each year by more than 50 per cent, without extra borrowing.

“As well as schools, the Fund will be used to pay for high quality projects like major hospital redevelopments and transport projects. More projects will be confirmed as decisions are made.

“We will be very transparent about the proceeds that go into the Future Investment Fund and very transparent about what assets it is used for.

“In this way the public can be assured that the proceeds of mixed ownership are not being lost. Far from it – the money we raise from mixed ownership is being used, in its entirety, to pay for valuable new assets that will benefit New Zealanders.

“And because we will have the money already there in a Fund, we don’t need to go out and borrow that money from overseas lenders, increase our debt, and pay higher interest payments offshore.

“That’s a win-win for New Zealanders,” Mr Key says.

The parlous state of several countries overseas as a result of excessive borrowing is a salutary lesson for anyone who thinks that’s what we should do.

Finance Minister Bill English emphasises the importance of not having to increase debt:

A National-led Government is committed to investing in modern infrastructure that helps build a faster growing economy with more exports and more real jobs, while keeping our debt low,” Mr English says.

“That’s precisely what our extension of the mixed-ownership model is all about. If re-elected, National will put the proceeds of mixed ownership – between $5 and $7 billion – into a new fund, called the Future Investment Fund.

“Through the Fund the public can be assured the proceeds of mixed ownership are not being lost. They will be used to buy new assets for New Zealanders, and to upgrade and modernise our existing assets, reducing the Government’s borrowing from foreign lenders by $5-$7 billion.

“Investing the mixed-ownership proceeds in this way will result in assets that are long-lived, are here in New Zealand and are owned by the Crown on behalf of all taxpayers.

“They will be part of a growing asset pool, with taxpayers’ assets forecast to expand from $245 billion now to $267 billion by 2016.

“We will set a high bar for projects to be paid for out of the Fund and the case for these projects will have to stack up. They will have to either improve public services or deliver substantial economic dividends for New Zealanders and can’t just involve the routine replacement of existing capital.

“Decisions on spending from the Fund will be made on a case-by-case basis, by ministers, as part of the normal Budget process.

“We intend the Fund to run for at least five years but this of course depends on how much the mixed ownership model raises. The higher the proceeds, the more new investment we can pay for without having to borrow.

“The Government has clearly laid out its plans to extend the mixed-ownership model, which Air New Zealand has operated successfully under for almost a decade.

The Labour Party are opposing the partial sale of assets but using Air New Zealand in their campaigning when this is exactly the model National is proposing.

“After the election, we intend to extend this model to four other State-owned companies – Meridian, Mighty River, Genesis and Solid Energy.

“The Government will retain at least 51 per cent of these businesses and Kiwis will be at the front of the queue for shares.

“This will provide an investment opportunity for savers looking to put their money in something other than housing or finance companies.

“A large and growing pool of New Zealand investment funds will ensure strong local demand for shares. As a result, we expect New Zealanders to own at least 85-90 per cent of these companies.

The mixed ownership model will allow New Zealand individuals and organisations including ACC, superannuation funds and Iwi to invest in New Zealand companies.

Some shares might also go to overseas interests. Those opposed to the proposed sell-down portray this as somehow sinister, I don’t think it is.

All New Zealand superannuation funds have shares in energy companies in Australia so it is highly likely that Australian superannuation funds might be interested in buying some shares in ours.

The alternative to selling minority shares in a few assets is borrowing from overseas banks, almost certainly mostly Chinese.

Selling a minority share in a few assets or increasing our indebtedness? No contest.

Detailed policy on the FIF is here; and on proposals for schools is here with a Q&A here.

23 Responses to FIF beats borrowing for new assets

  1. Scotty says:

    So are you advocating the same funding model for dairy farms.
    or is it only valid for a desperate political party ,who cant balance the books.

  2. homepaddock says:

    If we needed to invest in the farm to improve it, were already highly indebted and had other assets we would sell, that would be a very sensible thing to do.

  3. Scotty says:

    You would be happy to own just 51% of your farm?
    How many farms do you know ,that use that funding model?

  4. homepaddock says:

    Yes. Lots of farms use equity partnerships of varying percentages.

    We have one. The managers have a minority (25%) share now with a view to them gradually buying us out. They’re paid to manage the farm and their share in it provides extra motivation to do it well, the better the farm performs the better they do.

    We’re helping them into farm ownership, they’re enabling us to free up capital for other investments. It’s good for them and good for us.

    But your analogy of selling 49% of the farm would be like selling 49% of the whole country. The plan is to sell a minority share of a very few assets, not sell the whole country or even most of its assets.

    The example I gave in my first response, of selling surplus land or other assets is a better comparison.

  5. Roger Barton says:

    If it is good (according to some) to retain the full ownership of assets then we should also ask what other assets the Govt. should be buying on behalf of the people. We don’t currently own all the supposed strategic assets in NZ so why aren’t we buying more if they are such a good investment?

  6. homepaddock says:

    Oh, no, Roger – please don’t encourage them 🙂

  7. robertguyton says:

    So many New Zealanders disagree with asset sales, partial or otherwise. Hitching your wagon to that star, and that of ‘won’t talk about retirement age’, was a big mistake that can’t be reversed now.
    Pity.

  8. Scotty says:

    Or looking at it another way if private enterprise is so productive /profitable why do we need to open up public assets for investment.
    Its a ironic that conservative right wingers looking for a risk free investment,shun private companies and turn to state owned enterprises in droves.

  9. Colin McIntyre says:

    Airlines throughout the world have never been renowned as great investments for individual investors.In Air New Zealands case taxpayers over the years have provided financial lift to keep them flying.With the present monentary conditions prevailing throughout the world it is logical to expect further turbulence.
    Accepting these conditions, is it moral to ask the owners of the State Assets on the block, to purchase up to 49% of what they already own and have paid for?
    Surely this is just another form of tax?

  10. homepaddock says:

    Scotty – the problem is that we don’t have enough private companies to invest in which is why our big funds invest so much overseas.

    Isn’t it better for them to leave more of their money in NZ?

    Colin – think of it as a family business which needs invest ment in some areas and has surplus assets elsewhere. Some of the family will be able to buy shares in the assets you sell, all of the family will benefit from the new investment of the proceeds.

  11. robertguyton says:

    Surely Colin is correct. The simplest questions are the best. Why should we pay again, for what we already own?
    And the argument that the proceeds will be used to modernise schools is beyond pathetic. Governments do that from the tax the collect as part of their ordinary business, not by selling assets.
    What a crock.

  12. Scotty says:

    Rubbish ,Billions of dollars of shares are available this morning on NZX.
    What you mean is that their arn’t any under valued assets in NZ ripe for pillaging.
    Our renewable energy generators is not surplus assets.

  13. Sally says:

    Selling state assets will not increase our GDP. Only two ways to increase GDP.

    1/ Increase the working age population – Key won’t have a bar of it.

    2/ Increase productivity – This won’t happen as there is far too much red tape strangling small businesses which make the economy grow. The capital required is being constantly consumed by Central and Local government.

  14. homepaddock says:

    Robert – Colin isn’t correct and the mixed ownership model is simple, it works for Air NZ.

    Current spending for schools etc comes from tax but funds for longer term physical assets either has to be borrowed, come from surpluses or from partial sale of assets. We’re a few years from surplus and not in a position to increase debt.

    Scotty – why do ACC, community trusts and super funds invest so much overseas?

    Sally – If the partial sale of assets imposes commercial discipline you don’t get with SOEs then productivity will increase; and there are other parts to National’s economic and social plans to increase productivity.

  15. Scotty says:

    I see , overseas mum and dads now is it.

  16. homepaddock says:

    Scotty – some shares will go to overseas people or organisations, most won’t because our small investors and big funds – supannuation, community trusts, iwi, ACC – need more NZ investments.

  17. Key’s tax switch was supposed to stimulate the economy.
    Didn’t work.
    National is supposed to understand how to manage finances on a national scale.
    They don’t.
    Their best shots have failed.
    Now, out of desperation, they plan to sell stuff from under our feet.
    Very, very poor management.
    Very, very poor leadership.

  18. homepaddock says:

    It is working inspite of being hindered by natural and financial disasters beyond the government’s control but it takes time.

  19. Sally says:

    “Key’s tax switch was supposed to stimulate the economy.
    Didn’t work.” Correct RG.

    The reason it didn’t work was because Key and his mates should have known that taxes are only cut when there is a normal business cycle. But all they could see was election 2011 and power at all costs, not prudent financial management.

  20. Sally says:

    Kate A at interestco.nz sums up Key and his government very nicely.

    “Firstly it was to pay off debt, then it was to give opportunities to mum and dad investors, now its to fund schools. You know what they say about pinochio when he kept changing his story, his nose grew alarmingly long.”

    They know not what they are doing – Is no excuse

  21. Scotty says:

    Both investment options already exist. ,
    NZ investment opportunities ,for Iwi,ACC,etc of which there are many .,or
    Overseas investment opportuntities for those who want to invest offshore.
    Neither of which require the selling of our profitable renewable energy resources.
    Why is it a good idea to sell our profitable assets again?
    Ive waited all year for the promised “mature conversation” (keys’ words) the country was to have re asset sales.
    But all we got was a shrug and more lies.

  22. Colin McIntyre says:

    Air New Zealand flies under a unique set of circumstances.
    Becase of the layout of the country and the sizeof the population they can, when necessary,stifle competition, knowing that as has happened in the past , if they get into financial trouble the Govt will keep them in the skies with taxpayers dollars.Because of the financial turbulence ahead it would seem unwise for the government to extoll their virtues as a model to endorse.

  23. mort says:

    Please tell me how something that requires ongoing input and subsidisation is an asset.

    This is one of the fundamental things wrong with education today. People are taught that liabilities are assets. If it isn’t making more money than it costs to run it, it is a liability.

    How does a hospital increase the income for the country when the public health sector is becoming over run by cancer and chronic disease care, with a bit of trauma thrown in for good measure? Who are the main consumers of health delivered at public hospitals? How does making them well improve the balance of payments?

    How does a school building improve the nation’s income when all we are churning out is greater numbers of policy analysts, social workers, academics, union officials, town planners, taxa collectors and other non-entrepreneurial types? Do these clipboard wielders create anything apart from a headache for the productive sector?

    Callous questions, but no one else is asking them.

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