Kenneth Davidson's analysis (8/9) of electricity privatisation reflects a misunderstanding of how capital should be valued.
The essence of Mr Davidson's reasoning is that assets will always be worth more in the hands of governments because borrowing by governments costs less than the cost of capital for businesses, which not only have to pay more on their borrowings but also have to service equity investors who demand a (much) higher return than the government borrowing interest rate.
The fallacy in this reasoning is that it says the cost of borrowing should determine value. Taken to its logical conclusion it implies that Government should own everything. For example, consider the possibility of the Government purchasing, say, BHP. Because the Government would be able to borrow at, say nine per cent, could it then "afford" to pay a much higher price than BHP's value in the market? Of course not! Imagine the outcry from (among others) Mr Davidson if it did.
All assets, whether government or privately owned, should be valued by reference to what the generate, including what the market assesses as their prospective earnings (appropriately discounted).
There is no basis for a separate valuation of assets according to whether they are government or privately owned, although government-owned assets are likely to have a lower valuation because they are less efficiently managed and therefore generate less income/benefits.
That is, essentially, why it generally pays to privatise government enterprises and why there have now been 15,000 privatisations worldwide.
This experience has shown that the scope for improving the productiveness of former government assets is almost always underestimated, which is doubtless why United Energy paid $1.8 billion for assets with annual earnings of only $123 million.
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