Measuring the overall fiscal impact of extending a Mixed Ownership Model
Some have sought to estimate the overall fiscal impact of a Mixed Ownership Model by comparing equity returns offered by relevant companies, calculated on the basis of the book (or accounting) value of equity, to the Crown cost of borrowing.
The overall fiscal impact of extending a Mixed Ownership Model should not be estimated solely on this type of comparison for the following reasons:
- The overall fiscal impact will reflect a combination of factors. As per the discussion on likely impacts on the Crown fiscal position above, overall fiscal impacts will, along with foregone dividends, reflect a combination of proceeds received, lower debt servicing costs and foregone profits. The prices paid to the Crown will include a premium that reflects expected future earnings. This premium would effectively compensate the Crown for dividends and profits foregone.
- Measurement issues. The Crown would expect any proceeds from extending a Mixed Ownership Model to reflect the commercial value of its equity. Returns calculated on the basis of book (or accounting) value of equity are unlikely to offer an accurate estimate of commercial value. Measures of total shareholder return should be treated cautiously given difficulties in valuations.
- Expectation of compensation for commercial risk. Comparisons of this nature ignore the commercial risk associated with the Crown's investments. The Crown's cost of borrowing - measured on the basis of bond rates - solely reflects the direct cost the Crown faces when it raises debt. Because the Crown expects to obtain a return commensurate with the level of commercial risk it bears, it would expect its average returns from owning SOEs to incorporate some risk premium above the Crown's cost of borrowing. Dividend yields for the companies under consideration for mixed ownership have in some years been lower than the cost of Crown debt as some of these commercial risks have materialised.
Broader benefits of sharper commercial disciplines, greater transparency, improved investment opportunities and deeper capital markets will not be captured by this type of comparison.
An often cited concern is that mixed ownership will result in significant negative impacts on the current account balance. The Government's assessment is that extending a Mixed Ownership Model will encourage a stronger domestic savings culture in New Zealand while facilitating greater productive investment in the economy, developments which will reassure investor confidence in the country's ongoing ability to fund its large external debt liabilities with the world.[13]
Notes
- [13]This assessment is informed by Treasury analysis available online at http://www.treasury.govt.nz/publications/informationreleases/overseasinvestment/pdfs/oi-t2010-1266.pdf
