Wednesday, 19 June 2019

Are we ready?

The Budget came and went while I was overseas, and I've been catching up with the news and the coverage.

It's not surprising that a lot of the media and analyst attention was focused on the 'wellbeing' perspective: it's getting attention overseas, too, as in this thoughtful piece in the Financial Times ($?). It's equally unsurprising, though, that virtually nobody (as usual) has asked the simple Keynesian question, is the Budget expansionary or contractionary? Do its direct effects on government spending and taxation boost or brake the economy?

Here, buried (as usual) on page 15 of the 'Additional info', is Treasury's best guess at the answer. The 'fiscal impulse' is the effect of policy changes on aggregate demand, allowing for anything cyclical that might also be affecting tax revenues and government spending. A positive impulse is expansionary, and you can see that fiscal policy has been giving a decent 1%-of-GDP-ish boost to the economy in the June year just finishing. It's not doing a lot either way in the next couple of years, and then if policies stay as they are, it starts to modestly brake the economy over 2021-2 and 2022-3.

The last time we saw these calculations was at last December's 'Half Year Economic and Fiscal Update', or HYEFU, when they looked like this (I wrote about them here).

From a fiscal policy cycle-management point of view, the new profile makes a good deal more sense than the old one. In the old one, there was a stonking 2%-of-GDP fiscal boost in the 2018-19 year, when the economy didn't need it, nor was there any obvious reason why the brakes should have gone on immediately afterwards. The new pattern is rather more sensible: there's less of a pro-cyclical boost in this June year, and the brakes aren't getting applied in the coming June year.

It would be nice to think that this was a deliberate adjustment of fiscal policy to make it more attuned with the cycle, but it looks more happenstance than design. While there is a bit of extra spending in 2019-20 that helps draws the sting of the previously planned braking, otherwise it seems to be down to timing differences: spending didn't happen to the original timetable. Or as the official explanation puts it
The 2018/19 impulse is now estimated to be 1.1% of GDP compared with 2.2% forecast at the Half Year Update. This reflects changes in the expected timing of operating and capital spending. Some operating spending previously expected to take place in 2018/19 is now expected in 2019/20. Changes in the timing of spending and higher allowances announced at Budget 2019 see a broadly neutral impulse in 2019/20 compared with a -0.9% of GDP impulse forecast at the Half Year Update.
That's all understandable: we're all human, things always don't go like clockwork, and the incoming Coalition government didn't exactly have a fully worked-out policy programme when it first took the reins, so some slippage isn't a huge surprise.

But if you get biggish changes in the stance of fiscal policy happening by administrative accident rather than for proactive cycle-management reasons,  it does make you wonder how effective fiscal policy can be in dealing with cyclical ups and downs. You might well want to slow things down, for example, only to find the economy gets an unwanted boost from spending programmes kicking in late, or conversely find that planned fiscal boosts get undermined by slower than expected spending.

With monetary policy creeping ever closer to its practical limits, especially after the latest interest rate cuts in Australia and New Zealand, fiscal policy is necessarily going to have to do more of the heavy lifting to manage the business cycle in the next downturn, which may not be too far away if the Trump administration continues in brinkmanship mode. 

As it stands, however, fiscal policy is vulnerable to large ebbs and flows that can dwarf any attempt at fiscal cycle control. We need to be able to do something more effective when - not if - the next downturn turns up. Ideally, 'shovel ready' infrastructure spending programmes that could be rolled out quickly would do the trick, but while they're not impossible to organise they're not a doddle either. An alternative would be quicker-to-work defibrillator fixes like "put $500 in every beneficiary's bank account", which we we've shown we can organise (recall the recent winter heating top-ups to national super, for example).

I'd like to think there's someone in Treasury primed and ready to pull the Emergency Fiscal Boost lever. Am I wrong?

Friday, 14 June 2019

Competition papers coming up at the NZAE conference

The New Zealand Association of Economists annual conference is coming up (July 3-5) in Wellington, and if you're interested in competition issues there are some interesting papers due to be presented. You can find the current draft state of the full conference programme here and you can register to attend here.

Earlier this week I posted about Bill Rosenberg's presentation on "Low Wages: Is Competition a Factor", and Bill has pointed me to a paper scheduled for session 3.1 from the RBNZ's Christopher Bell on "Monopsonistic power in the New Zealand labour market".

Session 5.2 has the theme "Digital Markets and Competition Outcomes", and features three papers from ComCom economists: "Innovation in regulated and competitive industries" by Hristina Dantcheva;  "Airports regulation - evidence of the information disclosure regime working?" by James Marshall (I'll take a wild guess and say, the answer is yes); and "Assessment of competition in digital markets – challenges for economic analysis in the era of platforms, data and AI", by Michal Mottl.

Session 5.4, "Energy", has two papers I'll be especially interested in: "Identifying and estimating excess profits in the New Zealand electricity industry" from Victoria's Geoff Bertram, and "Petrol prices [still] rise and fall at the same speed as international oil prices" from Prince Siddarth at the NZIER.

There's also session 6.6, "Regulation and Industry", where the paper I'll be going to is "Retrospective Study on Stuff (Fairfax)’s Exits in the Newspaper Industry", a joint effort from AUT's Lydia Cheung and Geoffrey Brooke.

See you there.

Wednesday, 12 June 2019

Yet another reason why workable competition matters

A small but select audience turned out last night for the latest Auckland LEANZ seminar, featuring Bill Rosenberg, the Congress of Trade Unions' policy director and economist, on the topic of "Low Wages: Is Competition a Factor?". This was a reprise of a May presentation in Wellington which Bill gave in association with Peter Cranney, an employment lawyer at Oakley Moran: the May slides can be found here.

Maybe the topic is more of interest to a Beehive-focussed audience, but it's a pity more people didn't attend in Auckland, because Bill made an interesting case. Beforehand, I'd been afraid that he was going to have a go at attacking free (or at least workably competitive) markets, and I'd been sharpening my claws. Quite the opposite, as it happened: Bill's case might as easily have been titled, "Low Wages: Is Lack of Competition a Factor?". His argument was that businesses have accrued too much monopsonistic market power in the labour market, and for a variety of reasons, including as a side effect of increased market power in goods markets as 'super star' companies have emerged and (perhaps) merger policing hasn't been all that it might have.

Skewed labour markets are becoming A Thing in antitrust circles, and I suspect we're going to hear a lot more about them. Here for example is the peroration from a recent article (cited by Bill) in the Harvard Law Review:
Labor market power is ubiquitous and costly to society. It is bad for economic growth and equality, and fuels political conflict. Yet labor market power is generally ignored by antitrust authorities and never considered as a justification for subjecting mergers to scrutiny. This contrasts with the regulatory concern for product market power. We argue that this asymmetry is not justified by either legal doctrine or economic theory and suggest that the economic analysis of product markets regularly deployed in the scrutiny of mergers can easily be applied to the labor market (p600)
How you might address imbalances of market power in the labour market is the tricky bit. Maybe the generic competition law of the land has a part to play (on egregious use of no-poaching or non-compete agreements, for example), although as the Harvard Law Review article says, even in the litigious US it hasn't got very far. 

Bill's got a menu of other proposals (his slides 38-40). Two of them got the tick from me - raising productivity, and better support for people affected by disruptive job losses - and while I'm more ambivalent about the third route (a greater role for collective bargaining) it's possible that the Fair Pay Agreements Bill supports might deliver net benefits.

The real trick would be to pull off what Denmark's managed - retaining a high degree of employer hiring flexibility, while also providing a lot of support (eg through retraining) to displaced employees. We're not currently crash hot on the support side, as this OECD graph shows (original document here), whereas Denmark is tops.

These 'active' labour market policies also have something of a moral imperative to them. If you subscribe to the idea that freer global trade brings net national benefits (as it does), and you recognise that the overall benefits create winners and losers (as they do), then there's a good case for looking after those who have fallen in the overall victory. And there's also cold-eyed politics involved: if you don't help out,  the losers will turn on trade itself. Trump's election and the US ranking on the graph are no coincidence.

Well done Bill; thanks to Sasha Daniels from Spark who emceed the evening; and special thanks to James Craig and the team at Simpson Grierson who hosted the evening.

Monday, 10 June 2019

Pilgrimage and policy

It was mostly a mix of school reunion, family and social catch-up, genealogical research and all-purpose holiday, but a trip to Ireland and Scotland also allowed a side-outing pilgrimage to Adam Smith's grave in Canongate Kirkyard in Edinburgh. If you're ever minded to visit, go round the back of the church, and the grave is up against the wall of the church on the right hand side. I didn't notice it at first, but there is also a little trail of  'Adam Smith' plaquelets set into the grass that will take you to the right spot.

I wondered about the railing around the grave and the heavy duty lock: anti-market vandals? Like the nerk that scribbled anti-Smith graffiti on the yellow explanatory notice? Not so, said the formidably learned volunteer minding the church: she said it was quite common practice to rail a grave in the 18th century (Smith died in 1790). She'd also noticed that these days visitors to the grave tended to come from Europe rather than the UK, and her experience was that UK people tended to have very little knowledge of Smith: he had (she said) completely vanished from British school curricula.

I did my usual economics-by-wandering-around on the trip. Random observations:

Ireland's standard of living has pulled well away from ours. Comparisons are iffy because of big tax-domicile accounting changes to Irish GDP and an unusually large wedge between Irish GNP and Irish GDP, but it's safe to say that living standards per capita are now some 50% higher in Ireland than here. And it shows in things like the cars people drive and the quality of the houses. Ireland's no paragon of good policy or governance, it had an unusually nasty GFC, and it's got locational advantages we don't, but for all that it's clearly made a better fist of getting growth barrelling along than we have. Sure, GDP isn't everything, but if we had incomes at Irish levels we could afford a hell of a lot more wellbeing-enhancing initiatives.

There's no border between Ireland and Northern Ireland. One minute you're on the road from Letterkenny (in the Republic) to Londonderry (in Northern Ireland) and you're calculating in euros and driving to kilometre per hour speed limits, and the next you're thinking in pounds and observing miles per hour limits. That's it. No checks, no let, no hindrance - for now. This currently free passage is yet another of the potential casualties of the Brexit debacle, since the clowns running the process didn't join up all the dots (a commitment to the Republic as part of Northern Ireland peace talks to have no borders, versus the gaping hole in the customs and regulatory frontier with the EU that post-Brexit free passage would create, leading to various proposals for rickety 'backstop' fixes). But Brexit incoherence aside, hassle-free movement is a great idea. If countries like Ireland and Britain, despite sometimes prickly relations, can organise completely free movement, why can't Australia and New Zealand?

And on Brexit, if there's a hard no-deal Brexit, it's heavily odds on that Scotland will run a second independence referendum, and I wouldn't be surprised if it succeeded. Which might enable a more prosperous Scotland to do something about the state of its roads: years of false economy 'austerity' cutbacks to spending on road maintenance have left potholes everywhere (even on motorways).

There are indeed at least some limits to tourism. If you want to see one, visit the Giant's Causeway in Northern Ireland. It's an unusual geological feature, but considerably diminished by the hordes of people all over it (and it isn't even high season for visitors yet). We'll face similar issues in due course, and I don't think our new $35 a head levy on visitors is much of an answer to anything.

Some of our food exporters also face headwinds. There is a clear push, in the Irish and Scottish restaurant trades, both to explain where your ingredients have come from, and to use local providers. VisitScotland for example has an accreditation scheme which includes among its criteria, "Quality ingredients of Scottish provenance" and "Food miles kept to a minimum". 

Finally, coming back to Adam Smith, I hadn't known that since 2008 Edinburgh has a statue of him on its Royal Mile. The story of how it came about is told here, and well done all the organisations and individuals who planned it and paid for it. How much it is a statue of Smith, however, as opposed to a generic Important Person is in the eye of the beholder: for me, it could as easily have been a memorial to a sea captain. I'd like to have seen a book, and even if Smith is the father of the dismal science, would it have hurt to have shown him smiling?

Tuesday, 7 May 2019

Petrol profits

The Commerce Commission's paper on measuring profitability in the petrol business didn't formally call for submissions but if people had any views they could send them in by close of play today. Here are a few of mine.

The first thing is that, somewhat surprisingly, firms - perhaps many of them - can be earning persistent 'excess' profits even in workably competitive markets. The graph below, which is the absolutely standard 'demand curve crosses the supply curve' picture, shows how it happens.

We know that producer A would be earning its weighted average cost of capital at price Pbecause it is willing to offer to supply at that price, and it wouldn't if it wasn't. At the higher market price of Pe it is making above-normal-WACC returns.

Or as a very good text book* says, when you have upward sloping supply curves, as in my view you often will, "the market price in equilibrium will normally be determined by the level of cost of the higher-cost producers - the 'marginal producers' - who will make only a 'normal' profit (the market price only just covers their costs) ... At the market price, the lower-cost suppliers will make a healthy margin above cost".

So the ComCom paper is bang on when it says that "Even where competition is effective, the profitability of some suppliers may be above normal or competitive levels" (para 37) and that "Analysis of profitability by itself may not distinguish whether higher than competitive levels of profits are due to cost advantages [as with producer A in the graph], the exercise of market power, or a mix of both".

It follows that the focus of the profitability analysis should be firmly on the returns being earned by the marginal producer at Pe and not on intra-marginal producers like A. This was the approach correctly adopted in last year's first report from our Electricity Price Review (write-up here, with links to the review). It looked at whether prices were in line with the costs of the next (the 'marginal') generator commissioned.

The logic was
Contract prices that were above costs on a sustained basis would suggest weak competition among generators, and that the entry, or threatened entry, of new generators was not restraining prices. On the other hand, prices that were well below costs on a sustained basis would suggest looming problems with reliability of supply because new investment would not be able to keep pace with demand. The comparison suggests competition has been effective in restraining prices. Figure 14 shows how wholesale prices have moved broadly in line with the cost of adding more capacity. Importantly, there is no evidence contract prices have been above costs on a sustained basis in recent years (p32)
The other main point I'd like to make is that the ComCom paper currently places some reliance on where analysis of 'gross margins' might take you in any assessment of profitability. I'd say that the answer is, almost nowhere. They may have accounting or commercial relevance, but for all the reasons mentioned in para 68 of the paper they are indeed "an incomplete measure of performance". From an economic perspective gross margins tell you very little, although they might (in a very homogeneous industry) give some limited insight into productive efficiency. In particular there is no way of telling whether any particular level of gross margins is "too high"

I appreciate that in a world of limited and non-standardised industry data, ComCom is going to have to scrabble for whatever indicators, however indirect, are available to hand. But I'd downplay the gross margins route, and put more reliance on estimates of return on capital employed or return on equity (ROE), which in a market economy are the numbers that matter from an allocative efficiency point of view.

Two final small points.

In para 93 ComCom says that it will consider as an indicator of profitability "The returns being achieved on recent and proposed investment both by new entrants, and by existing participants expanding their operations, in the retail fuel markets ... we would expect returns on more recent investment to approximate the cost of capital if competition is workable and effective", which is very much along the lines of the point I made above about the profit conditions of the marginal producer. The only gloss I'd add is that, as ComCom looks at recent or proposed investments, it should be wary of the 'hurdle' rates companies tend to use to assess the profitability of investments (the projects have to have an internal rate of return that beats some minimum 'hurdle' level).

While generally it's very useful to examine internal company thinking at the time, the evidence is that hurdle rates are not good sightings of what the investing company thinks is its true WACC or ROE. The hurdle rate is typically well north of that, as companies tend to use hurdle rates to filter out overoptimistic managerial gaming of the investment budget.

And if the focus is going to be on ROE (as it ought), Stats already has some estimates of petrol company ROE in its Business Performance Benchmarker tool. Here for example are ROEs by size of petrol station. No idea of the basis of the calculations, but on the adage that if all else fails, read the instructions ...

* Gunnar Niels, Helen Jenkins, James Kavanagh, Economics for Competition Lawyers, 2nd edition, Oxford University Press 2016, p10

Friday, 3 May 2019

In a regulatory moo-d

The latest Auckland seminar from LEANZ - the Law and Economics Association of New Zealand - brought together a panel of experts on the theme, 'What's Right and What's Wrong with New Zealand Dairy Sector Institutions?'

An important issue at any time, but especially on the money right now with the current review of the regulatory Dairy Industry Restructuring Act (DIRA). So far (according to the Review website) it's reached the stage where it's analysing the submissions on the discussion document it put out last November, and the Review team is now working on policy recommendations for regulatory change. Unless I've missed it, there doesn't seem to be a master list on the site of all the submissions received, but google a bit and you'll find some of the main players' views. Fonterra's are here.

The LEANZ panel was a battle-hardened bunch of dairy experts: in alphabetical order Tony Baldwin, business consultant, A E Baldwin New Zealand; Phil Barry, Director, TDB Advisory (his LEANZ slides are here, well worth a look); Alex Duncan, Consulting Economist at Finology; and Alex Sundakov, Executive Director at Castalia.

It would be nice to say I came away with all the moving parts neatly analysed and clarified and put into a tidy box, but - in the nicest possible way - I didn't, and that's fine. As Mencken's Law says, "For every complex problem there is an answer that is clear, simple, and wrong".

That said, I can't say I was totally disabused of the notions in my head before I went into the seminar, either. 'National champion' strategies are to my mind poor plans (see here and here) and I think the Commerce Commission got the right end of the stick when it proposed in 1999 to disallow the merger that ultimately (via DIRA) became Fonterra (I dug out the details here).

They may not have settled down into a coherent whole, but some of the ideas I took away from the seminar were:

  • I liked Tony Baldwin's exploration of deep-seated, long-standing cultural norms in the dairy industry (including worship at the altar of 'white gold', dislike of competition, a wariness of markets in general and outside capital in particular, a strong desire for government involvement/support) and which, he argued, are still in play today and will continue to shape wherever we go next. Tony tells me he's polishing up his slides with extra commentary, and I'll post a link (and maybe some discussion) once they're ready. Alex Sundakov wasn't greatly minded to traverse 'old history' and suggested we should focus more on what's in front of us today, and there is that, but Tony's story still seemed highly relevant to me. Tony also concluded that the current regulatory structure can't deliver the strategy it's committed to, which I'm leaning towards as well. On similar lines Alex Sundakov also argued that existing institutional mechanisms aren't able to accommodate necessary market adjustments
  • Alex Duncan, who I last encountered when he took the Commerce Commission for its first walk through the intricacies of the milk price manual, made an intriguing point. The mantra in dairy has been 'value add': he questioned that. He felt that the ingredients business - your powders, your casein - could be the real money-spinner, because it has the production flexibility to turn out whatever pays best on the day, especially if a deeper futures market develops and enables it to lock in transient opportunities or sell-off existing positions if better ideas turn up
  • The seminar was largely free of entrenched  'pro Fonterra' and 'anti Fonterra' attitudes but still accommodated some discussion of Fonterra's calculation of the farmgate milk price. In  principle Fonterra could raise the input costs of competing processors via a high price. In practice, that's hard to square with evidence of profitable new entry (see for example Phil Barry's Slide #7) or with the potential discipline from investors in the Fonterra Shareholders' Fund who have an interest in making sure the dividend is not disadvantaged by an overly high farmgate price. Though, as someone said at the seminar, what effective recourse do they have other than to sell out of the FSF? 
  • Alex Sundakov was somewhat bemused by the Kiwi predilection for froofrooing over whether regulation is necessary and what form it should take, and said that the Aussies tended to go "Bang! You're Regulated!" (my summary). Fair point - policy analysis in New Zealand has typically been, let's charitably say, exhaustive (don't get me started on reform of s36 of the Commerce Act). But I'm not sure he's right in this case about the Aussies' pace. The ACCC proposed a mandatory code of conduct for the processors who buy the Aussie farmers' milk back in April 2018, itself the outcome of an 18 month inquiry started in 2016. The draft code surfaced in March this year: who knows when (or if) the regulation will go live. And in any event, ditherers or not, Aussie code or not, dairy farmers in New Zealand are much better protected from oligopsonistic market power than their counterparts across the ditch.
A fascinating evening. If you're not on the LEANZ mailing list, subscribe. If you're yet not a member, join up. And thanks too to Richard Meade who organises the Auckland events, and to Bell Gully for the generous hosting that makes these seminars viable.

Wednesday, 24 April 2019

Revisiting regulation

In a later-career bit of diversification, I've been lecturing, last week delivering an intensive three-day course at the University of Auckland Law School - "Economic regulation: principles and practice", a master's level programme also available for some undergraduate study paths.

It's been stimulating: the class was high calibre, motivated, and ready with questions for me and the three visiting speakers I'd lined up. Big, big hat tips to Andrew Riseley, General Counsel on the regulation side of the ComCom house, Diego Villalobos, Principal Economist of the same parish, and former Telco Commissioner and the big honcho on regulation and competition at Minter Ellison, Dr Ross Patterson.

I don't know whether bringing in visiting firemen is standard in academia. All I can report is that, having tried it earlier at Victoria on a business cycles course run with colleagues Adrian Slack and Viv Hall, it seems to go down well with the students. They get to see that the stuff the lecturer has been going on about is actually what is happening and being used out there in the real world, and hearing it said in another voice probably helps it all sink in. Plus it also gives them some feel for whether they'd like to get into that line of work themselves later on.

Along the way I discovered a newish (2017) book that I recommended to the students as their first go-to resource. It's Thomas Lambert's How to regulate:  a guide for policymakers, Cambridge University Press. If you haven't come across it, it's excellent. Lambert is a full professor at the University of Missouri Law School, but evidently caught the economics virus as part of his undergraduate philosophy degree, and is very comfortable in the crossover badlands between economics and law. He contributes to the interesting Truth on the Market competition/regulation blog (I sympathised with their somewhat plaintive 'About us' description, where they say "We hope you find some of our posts insightful, thought-provoking, or at least mildly interesting").

His book had the structure I wanted for the course - an explanation of why workably competitive markets are the ideal, followed by all the instances where they won't necessarily work as well as you'd want (externalities, market power, asymmetries of information and the like), with good examples of how they can crop up and what you might do about them. You can currently get the paperback at the ever reliable Book Depository for NZ$51.16 (postage included) but if the pennies are tight or you prefer e-books you'll find Amazon does a Kindle version for US$20.79.

As you assemble your thoughts for a course like this, you wonder what the big takeaways for the students ought to be. Mine? The primacy of workably competitive markets; hence and otherwise the need to make sure any diagnosis of "market failure" is well founded; matching problems with the appropriate regulatory responses and, within that, prioritising more market-friendly and lighter-handed solutions; and regularly reviewing the need for regulation.

On which latter score we look to be doing reasonably well. I was encouraged by the latest rollback from the telco folk. The Telecommunications Commissioner Stephen Gale and his team are recommending that resale of Spark's copper-based voice services doesn't need its collar felt any more: "competition has been established, is increasingly effective, and is no longer dependent on access to these services". Right on, lads.

Though I'm less encouraged by the proposed 'building blocks model' (BBM) regulation of Chorus's fibre lines. One of Ross Patterson's points was that wireless broadband will serve as an effective competitive discipline on fibre prices, and I'm inclined to his view. The case for regulation no longer looks compelling, let alone regulation along the heavy duty BBM model that seems to have become our default. Fortunately, as Diego explained, we have had the wit to introduce an element of incentive regulation into the BBM at least as it applies to electricity lines businesses.

We also went through the history of the regulatory pendulum: right out to the pro-regulation side through to at least the late Seventies (France was still nationalising banks as late as 1982 and New Zealand was in regulatory lockdown until 1984); right back to the pro-market side up to the GFC; and the more recent swing to reregulation.

One thing that occurred to me is that, while the zeitgeist is now pro-regulation, and we may not now get a chance to fix them, the high water mark of the deregulation decades still left many areas overregulated when the tide started to retreat again. This past weekend's social and mainstream media, for example, are full of the follies of Easter trading restrictions, and (as I've said before) in an era when government funds are tight and we apparently can't find the funds for needed infrastructure in Auckland and elsewhere, successive governments have elected to go on owning a bunch of dairy farms, a policy which has not the slightest shred of public policy rationale.

Finally, we had a bit of fun in the class with the Weighted Average Cost of Capital (not a sentence you ever thought you'd read). We played "guess the beta", beta (for those who aren't regulation tragics) being a parameter in WACC which attempts to capture whether a share is more volatile than the average share and which might therefore need to offer a higher return. Beta is defined as how much a share price goes up relative to changes in the share market as a whole: beta greater than one, it goes up (and down) more than the market, beta less than one, it doesn't do as well (or as badly) as the rest of the market.

So I showed them the betas for a few of the listed utility-style companies, based on the very useful financial data you can find at Yahoo! New Zealand's finance site. You have Chorus on 0.61, and the gentailers not far away: Meridian 0.71, Genesis 0.79. And I pointed out that the current beta in the default price/quality paths for the electricity lines businesses is 0.72. Same diff.

All good, and then I showed them some companies and asked them to guess their betas. The class generally made a good fist of the likes of Auckland Airport (1.17), Fletcher Building (1.26), and Sky City (1.41). The surprises, for them and for me when I was devising the mental exercise, were Port of Tauranga (an unusually low 0.48) and - for a company down the higher-tech end and, with its assembly line robotics, you'd imagine would be facing some leveraged exposure to world trade - Scott Technology's oddly low 0.67.

ComCom had a go a while back at pulling together the literature on what drives betas - it's here, on pp35-8 - but I can't help feeling that it's still a work in progress. You'd wonder if the betas are sometimes more driven by the fads of investors than by the inherent volatility of the firm's line of business. 'Value' stocks for example can have extended periods in the sun - right now, for example, surveys of fund managers show that steady-Eddie utility shares are all the rage, partly because of the current 'hunt for yield' - only to languish later when 'growth' stocks are the in thing. And we regularly see 'sectoral rotation', where you can't give tech shares away one day and can't get them for love or money the next.

So despite the WACC cost of capital equations that look cut and dried, there's still a greyness around appropriate rates of return. Even if it wasn't a good idea anyway for dynamic efficiency reasons, ComCom's practice of using things like the 67th percentile of an estimated WACC range is exactly the right thing to do as a guard against faux precision.

Speaking of rates of return, ComCom has just put out the latest couple of papers as part of its petrol market study, one on what they're minded to zero in on and another on measuring profitability. If you want to respond to either of these (and I'll likely rise to the bait on the profitability one) you've only got till May 7 to do it, so skates on. And if market studies in general are of interest, don't forget to sign up to their update mailing list at

Friday, 22 March 2019

Is there a credit squeeze?

This is from the latest ANZ business survey, and it worried me. If businesses are finding it hard to get finance in good times - and we're still in what is now a sustained eight year long expansion - what on earth are their prospects of getting credit in bad times?

It could of course be that they're just venting, in the way that surveyed 'business confidence' has a fair degree of politics in it, although it's not obvious what extraneous factor could drive such a large and prolonged fall in the expected ease of credit.

As it happens, there is another window into credit availability, though it's not the easiest to peer through. The Reserve Bank's credit conditions survey, in its current form, is run only six-monthly, and so far covers only March and September 2018, so it's not yet the full monty. There was a longer-running 'experimental' one which goes back to 2009, but it's not possible to align the old and new ones perfectly: the Bank says that "The mapping of historical indicators to the current set of indicators ... is imperfect". But I've done it anyway just to get some sort of longer-run feel.

Here's what the banks say about the recent availability of credit to SMEs and to the big end of town, the corporates and institutions. You can see the unfreezing of credit after the GFC, a rather mysterious temporary pullback in SME lending in 2013-14, and more recently a progressively tighter approach (barring that uptick in corporate credit on the latest reading, which may be a blip).

Strictly speaking the ANZ survey asks about expected rather than historical availability of credit, but fortunately the RBNZ survey also asks the same question. Here's what the credit suppliers answered when asked.

Assuming that zero on the index is neither happy nor unhappy, they're saying, essentially, that they're slightly on the relaxed side of lukewarm about extending business credit in coming months. They're not outright gung-ho, but they're not shuttering up the shop, either.

So there's not a great meeting of the minds at the moment between the businesses who respond to the ANZ survey and the banks who respond to the RBNZ's. Maybe the businesses are griping more loudly about extra documentation and hoops to jump through, but are actually getting the credit in the end, despite all the hassle along the way. Let's hope there isn't any genuine blockage in the flow of funds to businesses wanting to invest: the cyclical outlook is getting a bit more fragile, and it doesn't need any more headwinds.