Dr Eric Crampton: Council ownership

A standard popular argument for public or council ownership over private ownership is that private shareholders are too short-term focused, at the expense of longer-term value.

It's an eminently debatable proposition. But as always, Demsetz would say 'as compared to what?'. We always need to compare how the alternative works in the real world.

Here's Oliver Lewis over at BusinessDesk:

To mitigate rates rises and fund services, Christchurch City Council will be asking its commercial arm to frontload dividend payments and provide $47 million extra over the next three years.

The move, endorsed by councillors at a meeting on Wednesday, drew a forthright warning from Christchurch City Holdings (CCHL), which controls assets worth more than $5 billion on behalf of the council.

CCHL chair Abby Foote – who has repeatedly spelled out the constrained financial position of the group and the need to start paying down its $2.3b of debt, $440m of which was taken on at the bequest of the council for the earthquake recovery – said the new request placed the CCHL board in an extraordinarily difficult position.

'Do not add up'

“We cannot pay down debt, grow dividends to council and invest in the resilience and growth of our critical infrastructure,” Foote said. “These things simply do not add up. We cannot do them all, and that is what we have been saying for the last 12 months.”

Explaining the request for extra dividends, interim council CEO Mary Richardson said she and chief financial officer Bede Carran met with CCHL last week. Staff believed the request for additional dividends, which was supported by councillors at the meeting, was doable to help restrain rates increases and allow the council to deliver on its capital programme.

When we lived in Christchurch, it always seemed as though Council was underinvesting in maintenance and keeping up with depreciation at the Port.

If a private company is excessively sweating assets to benefit current shareholders, there are a few potential disciplining mechanisms. Shareholders have incentive to watch over management practice; behaviour that reduces long-term value will ultimately hit shareholders. And takeovers always remain a possibility.

A market test applies. If management is taking the piss when arguing for lower dividends, shareholders can check. Management can be replaced. Analysts skilled at figuring this stuff out can buy out existing shareholders and increase value. Nothing in this world is perfect, but there's a correction mechanism here.

What disciplining mechanisms kick in if managers of a council-owned company say that the council owners are insisting on sweating the assets too hard? If they're right, no alternative owners can come in and replace the current ones. There's no discovery process to find out whether they're right.

There's some chance that Council is running down the port to help pay for the new stadium. Does that seem like an entirely good idea, or an advertisement for the merits of public ownership?

Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE