Economic research firm BERL has suggested the government borrow domestically to finance infrastructure spending set to be paid for by revenue from the government's asset sales policy.
The Green Party commissioned BERL to look at the government's policy to sell up to 49% stakes in Mighty River Power, Meridian Energy, Solid Energy and Genesis Energy, as well as selling its 74% stake in Air New Zealand down to no less than 51%. The Government is hoping to raise between NZ$5-7 billion over the next five years from the sell-down, which will be used to pay for new capital spending such as school upgrades and irrigation schemes.
BERL economist Ganesh Nana said the 'mixed-ownership model' (MoM) policy, as it stood, would worsen the Government's deficit in the short term compared to a no-changes baseline scenario. That was because the Government would lose some of the dividend stream it received from the assets partially sold.
It would then take a number of years for new assets such as schools or broadband infrastructure to affect the Government's tax take positively enough to cover that lost dividend stream.
In the long-term the Government's annual deficit would return to the baseline scenario, but the Government's net worth, total assets and debt ratio would be worse than the baseline, Nana said.
He suggested an alternative option where the Government borrowed from the domestic private sector to finance its investment in the new assets to be paid for by the MoM proceeds.
This would initially increase the Government's interest bill on its borrowings, increasing the Government's deficit in the short-term compared with the baseline no changes scenario.
However, the deficit would not be as bad as the scenario of selling assets to finance new investment, Nana said. This was because of an assumption the interest cost on the debt would be less than the dividend yield the Government received on the mixed-ownership assets (which BERL assumed to be a yield of 8%).
"Why sell them an equity stake on assets, why not just sell them a debt instrument. Why not get some of them to lend to government," Nana said of 'mum and dad' investors with billions of dollars worth of cash in bank term deposits.
The Government would likely have to raise the yield on its debt to compete with term deposit rates to attract the investment. The scenario would be better off up until the point the return on the bonds was the same as the Government's return received from dividends from the mixed-ownership companies.