Saturday, 19 November 2011

More Goffonomics

From Kiwiblog today we learn:
On The Nation today:
Duncan So looking at the asset sales, if you were to get into government and not sell those assets, how would you control power prices? Because that has been a major issue over the last ten years, and National one of their big attacks in office has been that under your leadership, when I say leadership I talk about the Labour government, power prices went up 70-80% over ten years. What will you do? What reassurance can you give to voters that you’ll control power prices.

Phil [Goff] Oh the power prices are gonna fluctuate depending on how much extra you build in terms of generation. No but what you can assure them is this. That you don’t have an outside foreign investor coming in, wanting a really big return on their investment, because you know, and you know from Contact Energy that this happened, that your power prices will go up if you privatise. Contact Energy was charging 500 bucks a year more for an average family of four, than any of the SOEs.
Now I take it from what Phil Goff says about foreign investors that when they take over a company they want a really big returns on their investment. But even if they do want such a return how can they get it? Does Phil think that just because they want a big return they can somehow force people to pay a high enough price to give them this return? And if they can create any revenues they need to get the return they want why not go for an infinite return?! I mean if you can get any return you want then infinity sounds good. Phil seems to miss the point that customers can change suppliers if they think prices from one particular suppler are too high and even if they couldn't investors can't get any return they want since the maximum willingness to pay is bounded by the height of the demand curve.

Also if foreign investors can want, and get ,these high returns why can't New Zealand investors want and get the same returns? The price of power does not depend on the nationality of the owner of the power company. I assume that New Zealand firms can maximise profit just as well as foreign companies.

In addition the SOE Act requires that the SOE is as successful as a non-state owned firm:
Principal objective to be successful business
(1) The principal objective of every State enterprise shall be to operate as a successful business and, to this end, to be—
(a) as profitable and efficient as comparable businesses that are not owned by the Crown;
So if foreign owners can get these really big returns then the SOE has to act in such a way as to get them as well.

So the SOE, an New Zealand owned private firm and a foreign owned private firm will all charge the same prices for power as they are all trying to maximise profits. Thus prices will not rise if SOEs are privatised.

Now if these evil, bad "foreign investors" really can increase the profits and return paid by the power companies then this will be because they are more efficient in using the resources of the companies. But in this case we want them to be the owners as we want our resources utilised in the most efficient manner possible.

So ignoring capital xenophobia, foreign ownership looks good.


JC said...

Phil is fibbing again


horace the Grump said...