Auckland airport – what’s the issue?
So the government has announced changes that have been pushed through parliament in order to ensure that “ministers will be able to block the sale overseas of any land or assets if it runs counter to the need to maintain New Zealand control of strategically important infrastructure on sensitive land“.
Now I’m not an expert on why or how we should maintain New Zealand control of strategically important infrastructure. Around the blogsphere, I see some people arguing against this proposal (here, here, here, and here) and people arguing for it (here and here). From all our special conversations about positive and normative economics we know that we cannot make a definitive conclusion with making some value judgments – however that shouldn’t stop me from describing some of the things I believe are pretty close to facts about this policy.
First lets us ask what the benefits for New Zealand from selling the asset are (as commentators seem to be uninterested in how this decision affects the welfare of other countries):
- Selling an asset creates funds that can be used.
- The new owners of an asset may have more efficient ways of running the company (better management practices etc), which would ceteris paribus (pretty much, as long as it doesn’t increase market power) increase consumer surplus.
- New owners may have benefits stemming from a number of attributes (economies of scope and/or scale, vertical integration). (Not applicable in AIA case, as its a pension fund from Canada buying it)
- Producer surplus is higher – as the local owners have to be willing to sell the asset in the first place, implying that the opportunity cost of selling the asset (which is keeping the asset) is of a lower value to the firm.
The costs come in the form of:
- Greater market power for the firm (doesn’t hold in the case of AIA).
- Loss of ‘social benefits’ from local ownership.
- The dividend payment that heads overseas from the asset.
As long as the business is sold for fair value we should be able to cross out benefit 1 and cost 3. Why? Well we get a capital inflow of $x for our asset, which can be used to buy assets overseas. If the two assets are valued equally then the expected yield should be the same (unless of course, one was expected to record a greater value of capital appreciation for some reason – but returns should ultimately be equalised).
Since benefit 3 and cost 1 don’t hold in the current case, the government should only intervene when cost 2 > benefit 2 and 4. What the hell am I talking about?
I’m pretty much saying that the ‘social benefit’ of local ownership must exceed the gain to current producers and consumers of this sale going through. Ignore all the crap about our current account deficit (although Bernard Hickey is exactly right when he says that this government posturing will increase interest rates, as it increases risk – I believe you could call this risk a social cost of the policy) and ask yourself if you think that your concept of social benefit from ownership of an airport exceeds the potential benefit to consumers and those that have the property right over the asset – as this is what the argument boils down to.
What could this ‘social benefit’ be? I’m not really sure. If you believe that stuff about local business owners investing more in their communities, or having a more altruistic utility function then that would be one. However this is a value judgment, and should be framed as one.
A more satisfactory social benefit may come from the relationship between government and its citizens – laws on locals may be more effective than laws on foreign owners.
Now I better say what I think. I don’t think that the social benefit exceeds the benefit to the owners of the airport, and the consumers of the airport – so I say let them sell. However, I haven’t gone through any finances or done any work so I don’t feel qualified to make a policy decision 😉
How do you quantify “Social Benefit” and weigh it against more easily measurable things like profits?
Wouldn’t you agree that public outrage at the news that they were considering selling Auckland Airport would be a sign or a measure of Social benefit?
I’m not entirely sure what you mean by “laws on locals may be more effective than laws on foreign owners” – if you are saying that it will be more easy to control the airport if it is locally owned, I’d say you are right, and I think this has a lot to do with the public opinion against the sale to foreign owners.
I think you need to clarify further why you reached the conclusion that you did. After outlining the pros and cons succinctly and well, your statements weighing social benefit vs potential producer and consumer surplus came down to a series of opinions, rather than facts.
The fact is, we don’t actually know how well – or more to the point, how much better – a foreign owner could run the airport, and how much the surplus would be. There is a risk there, a potential that the surplus may end up being a surfeit. You yourself said a foreign owner MAY have more efficient ways of running the company. That’s not a heck of a lot of certainty there is it.
“How do you quantify “Social Benefit” and weigh it against more easily measurable things like profits?”
Economists don’t really quantify ‘social benefit’ it is something that is created by a value judgment – I believe the benefits to society will be. If I had some data I might be able to point to some potential social benefits in a more objective way but I don’t have that.
This is something we discuss on this blog alot, how normative assumptions and positive assumptions must be separate.
Also there are a number of other social costs and benefits that would need to be included if we look at this issue.
“I think you need to clarify further why you reached the conclusion that you did. After outlining the pros and cons succinctly and well, your statements weighing social benefit vs potential producer and consumer surplus came down to a series of opinions, rather than facts.”
You are exactly right – As I said I don’t know anything about the Auckland airport case, and my belief that it is probably better to leave it as is is just that a belief. The purpose of my blog article was to lay down the costs and benefits – any conclusions I made were a throw away line that people can disagree with and even change my opinion on.
I don’t think I should clarify my position any more as I don’t really have a position. If someone paid me to come up with a policy conclusion on Auckland Airport I would try to go through and quantify everything I can, and then give a feeling of where it would be better and where it would be worse.
“The fact is, we don’t actually know how well – or more to the point, how much better – a foreign owner could run the airport, and how much the surplus would be.”
True, my facts only gave an idea of the direction things moved – it did not quantify them.
Indeed, the best we can do is look at the difference between the valuation that the new owner places on the firm and the current valuation. If the new firm values it at a higher rate it will be because they can run the firm in a more ‘efficient’ fashion (note excludes social costs and benefits).
Ultimately, I’m very happy for you and everyone else to disagree with my conclusion – if our implicit value judgments do not match we do disagree, and we should disagree. The main purpose of this blog post was to look at the costs and benefits – not to weigh them up. As a result, discussing our different value judgments may not lead to us agreeing but could be interesting.
If you think that my ‘facts’ are wrong (which you didn’t say) then that is somewhere where we need to work together in order to find out what the full set of facts are.
Hi Matt,
Would you be able to clarify your comment on the current account deficit, “ignore all the crap about our current account deficit”? I’ve never liked Balance of Payments accounting, but is it correct to say that the sale will cause an immediate positive increase in the capital account and a series of current account outflows into the future as dividends are paid to the foreign owners? If so, and as long as the price is ‘right’, I can’t see any reason to be worried about this.
“I’ve never liked Balance of Payments accounting” I don’t know anyone who does 🙂
“but is it correct to say that the sale will cause an immediate positive increase in the capital account and a series of current account outflows into the future as dividends are paid to the foreign owners? If so, and as long as the price is ‘right’, I can’t see any reason to be worried about this.”
Exactly! As long as the local investors receive a fair price (and remain in the country 😉 ) it doesn’t matter.
Furthermore, the financial capital that the investors collect could be used overseas, or to pay down debt, or for consumption even – however the “value” of this choice must be greater than the dividends available from the asset, as the investor decided to sell it.