Consulting on asset sales

22/05/2012 § 2 Comments

The Green Party released a report yesterday on the planned part-privatisation of state-owned assets. The report was written by BERL.

Let’s not be naive about this. The Green Party didn’t go looking for someone to tell them that the government should sell everything and stick to assigning and protecting property rights. If they had, there are economists who would have obliged. The obvious question, given that the report supports the party position, is how good the economics are.

This is an example of a central issue with consulting: providing clients with what they need or want while maintaining professional credibility. It’s an issue we’ve discussed here and one that Eric Crampton has also considered.

This BERL report is a great example of a consulting report. How did they do it? Here are some techniques:

  • Limit the question: The report calculates the impact on government finances from three scenarios. It doesn’t ask what the economic or GDP impact of public ownership is. That’s a harder question; it would also get into more complex assessment of efficiency of ownership structures and political analysis of allocative issues. BERL avoids those questions by focusing on government finances. This technique has the same function as ‘defining your terms’ and ‘setting the terms of reference’.
  • Show your work: The BERL calculations are shown in detail so you can check the maths. This keeps everything transparent and shows that the consultants have nothing to hide. Making a public display of the calculations hides things in plain sight, like Poe’s ‘The Purloined Letter’. When the consultants are challenged, they can say they have been completely honest. The key is that the calculations make no difference to the findings.
  • Assume your answer: Inputs drive the outputs in a model. So, choosing the right inputs or the right assumptions is key. BERL does this very clearly. They assume that any new asset has the same dividend as any asset that is sold, but takes a while to start yielding a return. This has the effect of assuming a loss, which they then calculate. They also, in the text, indicate that this is a key assumption and changing it could change the results of the analysis (see, ‘Show your work’).

This report does something valuable for the asset sales debate. It asks, ‘What are the stated reasons, and what calculations could we make to assess the reasoning?’ It then lays out a simple financial model. In doing this, the report suggests that the stated reasons don’t really hold up to analysis, which is useful by itself. The report also challenges supporters of the asset sales to say which input values are wrong and reveal their own assumptions. That changes the debate from ‘good versus bad’ to ‘what rate of return do you expect?’ That’s progress.

UPDATE: Now that coffee #3 is working through my system, I have finally noticed that Eric at Offsetting Behaviour has weighed in on this report, questioning the validity of the assumptions. Also, TVHE started with a bleg and ended with an informative comment thread.

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§ 2 Responses to Consulting on asset sales

  • Seamus Hogan says:

    Bill

    You seem to be saying that the BERL report has progressed the debate because, in effect, they have stated that their conclusion is that the asset sales would be a bad thing if the rate of return on the replacement assets was less than the rate of return on the sold assets, but could be a good thing if the inequality went the other way round.

    Hmmm. Somehow, I think the nation’s subeditors writers didn’t quite manage to get that conclusion into their headlines.

    • NZIER is a competitor to BERL so perhaps Bill feels constrained to being in the range where his commentary is rightly seen as blunt critique by economists but is misunderstood by the nation’s subeditors.

      It would have been rude of Bill to point out that BERL’s analysis around external balances was either mendacious or professionally incompetent and, either way, sufficient for expulsion from any professional association of economists with an ethics code.

      BERL knows what it is. BERL’s clients know what they want. Where the ultimate intended consumer of BERL’s work is the 3-second soundbite on TV3, the client doesn’t need something that’s defensible to Treasury, other economists, or anyone else. They just need something sciency. And BERL does a great job in producing that. I salute them. They’re discrediting the entire profession and every day working to bring economics into disrepute, but why shouldn’t they if they can make a buck at it?

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