Bad arguments against selling the government's stake in Eurostar

The same bad arguments crop up again and again in political debates. The government is now looking, as it planned in the 2013 Autumn Statement, to sell off its 40% stake in Eurostar, for about £300m, as part of a general plan to get £20bn from privatising assets. In response, one popular argument is that the government is throwing away an asset, part of the 'family silver' that generates a few million quid each year for the exchequer.

But as I have repeatedly argued, this makes no sense. Instead of holding £300m in railway shares it can pay down debt, earning (approximately) the same risk-adjusted return. Even if they gave it away, they could just tax the returns from the private sector. As I said before:

A firm, in doing business, puts capital to use. It uses a mix of physical and human capital and devotes it toward achieving tasks in order, usually, to turn a profit. From this capital you get a return. Train Operating Company margins average about 4% over the last ten years. The average company got more like 10%. FTSE100 companies seem to enjoy higher returns. Of course, operating profits are not share returns, but they tell more or less the same story. The extra couple dozen billion the government would need to spend on trains could equally be spent on equities or anywhere else for more or less the same risk-adjusted return. The return they got here could be put into trains.

If the government returns that couple dozen billion to the population at large, the government can tax the income that the private citizens make on the wealth, at a glance dealing with the problems of governments holding wealth—principally: they are not very good at picking winners. Or they could pay off debt and reduce their repayment costs—since the risk-adjusted return of gilts is priced in just the same way as other assets.

This is just a general application of the problem of government's holding assets, which I have written about at length:

So maybe the government should hold some wealth, I can see the arguments for and I can imagine some arguments against. But if it holds wealth it ought hold assets as broadly as possible: because it’s not placed to take gambles on particular assets; because doing so may distort markets directly; because holding assets takes them off the market and reduces allocative efficiency; and because holding particular assets may distort the incentives facing policymakers. Thus we should praise Gordon Brown for selling off gold just as we should praise Vince Cable and George Osborne for selling off the Royal Mail.

To be fair, in this case the French & Belgian state stakes are going to stop this 'privatisation' leading to big allocative efficiency gains, but these widely-made arguments are still extremely unconvincing.