Labour: locking in lose-lose

datePosted on 18:53, March 13th, 2013 by Lew

David Shearer says he won’t rule out buying back shares in state-owned power companies sold by the government. He won’t rule it in, either. Why? Does he need to consult his leader?

There’s so much wrong with this that I scarcely know where to start. This buyback agenda has been set by Winston Peters; it’s now two years since the 2011 election campaign kicked off with a pledge to sell these assets, and it’s like the boffins in Labour haven’t yet had an original idea about it. The problem with old generals is supposed to be that they fight today’s war with the strategies of yesterday’s war, but this is worse — it’s fighting yesterday’s war with the strategies that lost the one before that.

But enough about my thoughts on the referendum. This time the issue is what happens after the SOEs are sold. Chris Trotter has articulated strong political arguments for nationalisation, and I think these serve to demonstrate that nationalisation is not simply untenable for a left-wing political movement.

So while I’m not persuaded the opposition should do it, there’s definitely a right and a wrong way to go about nationalisation. The core principles are similar to those in play with the initial privatisation: that we should have good information about the intentions of the main political decision-makers; and that people should not have property expropriated without due process. This need not be perfect consent — an election result delivering under 50% was sufficient to grant a mandate to privatise half the value of these assets, for example.

Market and electorate signals
Shearer’s “maybe we will, maybe we won’t” is the worst possible position. The markets into which these shares will be floated need signals so as to judge risk, and the electorate needs signals so as to judge the quality and character of the politicians they might vote for in 2014 and beyond.

A clear “we will buy them back” or “we will not buy them back” would do that; it would tell the market and the electorate what to expect and they could act accordingly. Both groups would know we were dealing with politicians of at least some sort of conviction, and more to the point, someone willing to make some big calls, to put something on the line. Today we see before us a Labour leader who has neither the conviction to know what he wants to do, nor any will to do it.

As Chris says, a stance one way or the other would provide Labour with a mandate. If Labour considers nationalisation irresponsible, then as voters we ought to know that; but it is much more crucial to justify an actual nationalisation programme. Given that the current criticism of the government is that they lack a mandate to do something they campaigned for a whole election year on doing, I struggle to see how even the most one-eyed Labour partisan could honestly justify the massive expense of buying back SOE shares unless it was clearly signalled and voted on beforehand.

This need not be unconditional. Graeme Edgeler has suggested a provisional pledge — Labour could say that if, say, two thirds of respondents in the referendum vote to not support the asset sales then an incoming Labour government would seek to nationalise them. David Shearer has many options that are better than “maybe”.

Economics of a sell-off/buyback
If Labour genuinely believes — as it has told us for two years now — that the value of these assets is greater than the cost of borrowing to buy them, it should be easy enough to show that buying them back at fair market value is worthwhile. This will likely have the effect of inflating the price, but it would at least do our international reputation comparatively little harm.

It might be reasonable for Labour to pledge to buy the shares back at cost, but only if the pledge is made credibly and early — certainly no later than the first round of sales. The pledge would be fair warning to investors: if they choose to disregard it, that’s on them.

Because it allows the markets to price in the risk of a Labour-led government coming in and making good on its promise, signalling nationalisation in this way would likely depress the initial sale value of shares. If the threat was sufficiently credible it could, in principle, depress demand for shares to the point that selling them would be uneconomical — thereby preventing the sale, or limiting it to just one or two SOEs. While this would look bad for the government there is also a downside risk that the opposition would be seen to be sabotaging the scheme — but given that Labour seems certain the scheme is unpopular, that should not concern them too much.

Because there is an ideological imperative behind the sale (that is to say, the market already knows the government has to sell in order to retain political credibility) it seems likely the shares will already yield less than what an equivalent float by a less-motivated seller might yield. There are other industry-specific factors which could also depress the price — the fact that hydro generation is not much good in the middle of a historic drought, for example. I have no knowledge of the value of the assets as they stand, but it doesn’t seem totally outrageous that it might not be all that high as it is, and a little more risk might just be enough to turn people away.

Conversely, a nationalisation conducted after the shares have been sold has the opposite effect. An ideological bulk-buyer in a fair market will bid the price up. Even worse is the middle-ground: if there exists sufficient uncertainty before the float the sale price could be depressed; followed by a Labour election win and nationalisation, causing the price to rise. The government would be selling low and buying high.

Venezuela of the South Pacific
The worst of all cases is if Labour does not provide a strong and credible signal of nationalisation ahead of the float, and then proceeds with a “surprise” nationalisation on an at-cost or dictated price — or worse yet, expropriation without compensation, as has been suggested by some of the more wild-eyed idealists. Parliament is sovereign; in principle, an incoming government could do this. But it would be a brutal assault on property rights and repugnant to a modern liberal democracy, especially one so dependent on international trade as we are. It could justifiably lead to New Zealand being treated as a pariah kleptocracy, and since the SOEs are being floated on the ASX and will likely include some institutional investors there, it could also have deep trade, diplomatic and cultural implications. I expect there is also the risk of legal challenge.

The worst aspect of holding the “maybe” position Shearer has taken is that the risk of “Venezuela of the South Pacific” scaremongering exists as long as this scenario is not clearly and credibly ruled out. I don’t seriously believe this sort of expropriation would happen under a modern Labour government, but political narratives needn’t be based on reality.

If Labour commits to nationalisation then scaremongering will commence, but at least the party will be able to control the narrative around it, and articulate arguments in principle for it, as Chris has done. If the SOEs are that popular it shouldn’t be too big a risk. If Labour rules out nationalisation then such scaremongering may still eventuate, but will be weak. If they continue to sit on the fence, they get the scaremongering, but not the opportunity to rebut it. Lose-lose.

That Labour would even consider holding the “maybe” position is astonishing, but it is New Zealand First policy after all. It reflects an awareness that New Zealand First is here to stay, will probably hold the balance of power at the 2014 election, and could make nationalisation a condition of its being part of any Labour-led coalition. The deep problem is that Labour, lacking a political agenda of its own, is letting others define it. Until the party leader is prepared to lead, Labour will keep losing.

L

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7 Responses to “Labour: locking in lose-lose”

  1. DeepRed on March 13th, 2013 at 19:25

    Clark’s Labour had no doubts about kicking the insurance cartels out of ACC. And David Cunliffe finally got round to unbundling Telecom’s copper wires. In both cases, there was wolf-crying about so-called “property rights” but it didn’t deter the Clark Govt one bit, and NZ didn’t turn into Venezuela. In the case of unbundling, it was in line with policies towards British Telecom and Ma Bell.

    If the usual suspects’ idea of property rights is buying up taxpayer-built state monopolies for a fire sale price, then turning them into rentier private monopolies, then Pierre-Joseph Proudhon had a point when he said that “property is theft”. And the IMF seems to be realising that austerity measures and structural adjustment programmes are doing more harm than good. To top it off, the credit agencies are facing scrutiny they’ve never before faced, for their role in the whole GFC mess.

    In contrast to Clark, Shearer sounds like he’s a follower instead of a leader, who’s trying to have it both ways. He might just be able to drive down the cost of a buyback by mentioning “Commerce Commission”, “price controls”, and “power companies” in the same sentence. Or even acting on the Electricity Authority’s suggestion of a KiwiBank of energy – not unlike PetroCanada or BNOC.

    It’s too late to stop the sale process now, but a strong dose of FUD could be far more effective than a symbolic referendum.

  2. Lew on March 13th, 2013 at 19:53

    Fair enough, but those who owned the shares being gutted of value were not “mum & dad” investors who had newly bought the dream of a brick in the wall at Karapiro.

    The last bit; yep.

    L

  3. Keeping Stock on March 14th, 2013 at 07:37

    Interesting perspective Lew. I can’t help but think that if you let Winston Peters set the agenda, it can only end in tears!

    From a point on the political compass to the right of you though, Winston Peters making re-nationalisation a bottom line in future coalition negotiations is good news. John Key got kudos for clearly rejecting Peters and NZF before the 2008 and 2011 General Elections, and Peters has given him a reason to do it again. Thanks Winston.

  4. Pete George on March 14th, 2013 at 08:10

    I don’t buy Graeme Edgeler’s suggestion of reading something from the referendum that is not the intent of the question. If you start that you could justify whatever you like on whatever the response is.

    The referendum asks if you agree with selling up 49% of specified assets, it does not address forced buy-back should they be sold.

    Apart from that, the referendum will be held after (some of) the share horse has bolted, it’s likely that many people will see little point in voting, so the turnout could be underwhelming.

    And because the referendum will be too late to affect it’s apparent purpose (if you believe the story the people have been sold) it’s also likely diferent interests will try to claim their own meaning from the question and the result.

    And as some have pointed out, Labour needs to be very clear about their position right now, before anyone decides whetehr to buy shares or not.

  5. Hugh on March 15th, 2013 at 00:48

    I am presuming that the reason Labour won’t commit to a buyback is that they wince at the fusilade of critiques that would come their way over the specifics of it. While there are certainly commentators who will fiscally deconstruct every Labour policy to within an inch of its life*, I’m not sure that the public responds to them that much.

    *Usually while blithely waving off Key’s policies with a bit of rhetoric and a few mutterings about the uncertainty of global markets, natch.

  6. Pete George on March 15th, 2013 at 05:05

    Shearer has clarified (a little) on this, saying in a radio interview:
    “Ah, look, the bottom line is when you sell these assets and the proceeds come in, and you spend them as the Government says it’s going to spend them on schools and hospitals, I don’t see how we can afford to buy them back when we came into office.

    I’m not going to rule it out, but certainly I think it’s very unlikely.”

    It’s still hard to know what he means and what he understands, if he thinks National should not sell and instead borrow more now it’s hard to see what he would think Labour shouldn’t borrow if they get in so they can buy back.

    I don’t think Labour should do that, but if he thinks National can afford to keep full ownership now then surely he would think a Labour government could afford full ownership.

  7. Sunny on March 16th, 2013 at 11:06

    I love that NZ First has said Buy-back will be a point of any post-election agreement. Given that the Party is almost certainly going to hold the balance, I want to see John Key cry…

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