Government as owner of substantial assets (continued)
Local authority trading assets
Local authorities also have very substantial trading assets. The most obvious of these are the ports[75]. Ports are vital gateways for an island trading nation. All New Zealand's ports have majority local authority ownership: in most cases now 100 percent local authority ownership. Only in one or two cases is there any effective market-based discipline on the use of capital in the port sector. Moreover, the economic return on capital appears to have been well below what would normally be expected from port assets that are run fully commercially[76].
The OECD, in its latest biennial review of the New Zealand economy, highlights port ownership as a significant economic issue for New Zealand. We agree. There are indications that New Zealand ports are fairly technically efficient for their size and scale: huge improvements in the productivity of the port sector occurred during the 1990s following the 1989 port reforms. Thus, in some sense, the main losers from the current ownership structures may well be the ratepayer owners, rather than exporters, importers, or shipping lines. However, those income losses are real. As importantly, local authority ownership tends to militate against the sort of consolidation and evolution of the port model in New Zealand that would be likely to occur with freely traded capital and majority private sector ownership.
We would not recommend that local authorities retain minority holdings in port companies but the biggest gains are likely to arise from the sale of majority stakes. As a somewhat parallel example, we note that Auckland and Wellington airports now have majority private sector ownership, but local authorities have retained significant minority shareholdings.
In addition to the port holdings, many local authorities have large ownership interests in public transport fleets, airports, commercial land and so on, Ownership of ports and these other assets is not a matter for central government to decide, but we strongly recommend that all local authorities should seriously review the ownership and governance of their existing trading assets with a view towards sale. The benefits - both for ratepayers as owners of these assets, and for overall economic performance - are likely to be just as real (perhaps more so) as those that would flow from the sale of central government's commercial assets.
New Zealand Superannuation Fund
The New Zealand Superannuation Fund (NZSF) was established by the previous Government, as part of its strategy to cope with expected demographic pressures on public finances that, on current policies, would become apparent from around the mid 2020s. At a time when the government was running large operating surpluses, it was also apparently designed to play a role in limiting the rate of growth in public spending. The suggestion was that any such discipline would be more effective than if the government had simply used the surpluses to repay outstanding public debt issues at a faster rate.
The extraordinary rate of increase in government spending that has occurred since 2004 - among the largest as a share of GDP anywhere in the developed world - makes it questionable just how much additional spending discipline the mechanism of the Fund has provided.
We do not believe that there is a case for retaining the Fund. It should be wound up and its assets used to repay debt. A number of considerations lead to this recommendation.
The government is no longer in budget surplus, and if it were to make contributions to the NZSF that could fairly be characterised as borrowing to engage in speculative investment. We find the case for that unconvincing, to say the least.
Perhaps more importantly, as we discussed in the chapter on government spending, we believe the demographic and related pressures can and should be addressed at source. There is simply no obvious reason to allow the share of GDP devoted to superannuation spending to increase very materially over time.
Thus, if and when the government accounts again show a credible prospect of moving into surplus, we believe that the benefits of getting spending under control should be used primarily to cut tax rates. In a country in New Zealand's position, lowering tax rates is likely to be the most productive use of any sustained improvement in the country's financial position. We would take the same approach if the sale of trading assets and wind-up of the Fund were to push the Crown into a material net financial asset position. Surplus resources should be returned to taxpayers, who are likely to use them more effectively than the government.
The governance arrangements for the New Zealand Superannuation Fund are of very high quality. They put specific investment decisions at a considerable arms-length from the government of the day. Nonetheless, the risks to the efficient allocation of capital if the Fund were to be allowed to continue have already become apparent.
The current Government campaigned on increasing the share of the Fund's assets allocated to New Zealand investments to 40 percent. This has not been mandated by statute, but over time it would be difficult for the Fund and its Guardians to resist the soft pressure to respond to government aspirations regarding the allocation of what is, after all, public money. That is particularly so if the Fund were to have been allowed to grow to the originally expected peak size (up to 50 percent of GDP).
As the Fund has grown even to its current size, calls from political leaders and leaders of various interest groups for the Fund's resources to be used for this or that infrastructure project, or to promote other apparently worthy objectives such as capital market development, have become more frequently heard. With the best intentions in the world, it is very difficult for a democratic polity to manage well large accumulations of assets[77]. That matters a lot more than it might otherwise in view of the scale of the 2025 challenge.
Notes
- [75]But include, in many areas, substantial holdings in airports and water storage and distribution assets.
- [76]See, for example, McDouall Stuart's 2006 report “The New Zealand Port Sector: Storm Front Approaching”.
- [77]The only successful example we are aware of is Norway's Petroleum Fund, with the important difference that those assets have been accumulated not from tax revenue but from a resource windfall, and in an economy with a large excess of desired savings over desired investment.
