The partial asset sales are a compromise, according to the SOE minister. But why are taxpayers the ones left with the beads and blankets while the other bloke laughs all the way to the bank?

Another week, another "trade-off" for National to sell. This time it's state assets. While Tony Ryall's a much more adept and experienced salesperson than Hekia Parata, he's still got a heck of a battle to square the circle on this one.

Ryall appeared on Q+A this morning, ready to argue the case for what National's calling its mixed ownership model and armed with the government's strongest lines. As we all know, National will this year start selling 49% shares in five state-owned companies. Mighty River Power's first on the block, followed in no particular order by Genesis, Meridian, Solid Energy and Air New Zealand (almost certainly the last plane off the runway, as it were).

So why does National think these partial asset sales are such a bonza idea?

At the heart of its argument is debt. As Steven Joyce said again in parliament this week, mixed ownership is "about controlling the nation's debt".

But now Ryall admits that the profits from Mighty River Power won't be used to pay down a single cent of debt. Nope, no debt will be paid off thanks to this sale (and presumably the others). The only way these sales tackle our public debt is that they save us from borrowing more money for schools, hospitals and KiwiRail.

Underwhelmed? Putting aside the fact our current public debt is low and even the IMF have shrugged and said 'meh' when they looked at it recently, if debt is so central to National's economic and political concerns, then you'd think they'd spend some of the profits on actually lowering it.

Ryall frets that our government debt is on the rise, however, from $52 billion now to $72 billion in three years. But that only goes to reinforce that the asset sales will make sod-all difference to the size of that debt. National, if things go according to Treasury's guesses, hopes to pocket about $1.8 billion from Mighty River Power. Even my maths is sufficient to see that a portion of $1.8 billion is a drop in the hydro lake that is $72 billion.

What it does, is help out a little for the next three years, while this government is trying to get back to surplus; so it helps National in the short-term. But our debt is set to leap after 2020, with or without these sales, as baby boomers' superannuation and health care costs kick in. So what's being done about those? Oh that's right, we're not allowed to talk about them while John Key's Prime Minister.

So the debt argument just doesn't stack up.

But it's worse than that. Not only do the sales not pay down any debt, the loss of dividends from these companies must ultimately mean more debt somewhere down the track.

Bernard Hickey pointed out to me this week that over the past ten years the companies primed for sale have delivered a return on capital of 16%. Government borrowing is currently near an all-time low, at around 3.5%. So we're sacrificing 16% to save us 3.5%? How does that make economic sense?

Yes, returns may go down and borrowing costs will go up. But even if you think privatisation is OK in principle, you'd have to question selling at a time when you're making good money and borrowing is so cheap.

So what about the idea that these sales give Kiwi "mums and dads" something to invest in other than bricks and mortar? Heck, we all want fewer people investing in rental properties.

"We think that the whole mixed-ownership programme is about providing more opportunities for New Zealanders to invest in the New Zealand sharemarket," says Ryall.

But is it really the government's role to rescue our anaemic stock exchange? If it's ideologically opposed to not creating jobs -- they're not "real" jobs -- then why should it create companies? Are these not going to be "real" companies?

What's more, how many mums and dads have spare investment cash anyway? And shouldn't they be paying off their huge household debt with any extra money, rather than dabbling in the sharemarket?

Nope, that argument doesn't make sense either.

Which brings me back to the "trade-off". That didn't go so well for National when they tried to apply that phrase to class sizes and teaching quality. But this time Ryall insists it's a good idea. Check out his answer on that:

"Certainly, if the government had decided to adopt the approach that we saw in the ‘80s and the early ‘90s, where the government was just going to sell the 49% stake to the highest bidder - maybe 49% to an overseas bidder - we might get a better price than we would if we weren’t going to have a float on the sharemarket. But I don’t think we’d get the support at the election that we got if we had proposed that. So this is not like the asset sales that we’d seen in the ‘80s and early ‘90s, which was selling them off to whoever the highest bidder is. This is a different approach...

"There is a tension, a trade-off, between selling the whole lot, the 49% to one investor, like they did in the ‘80s and the early ‘90s, versus trying to make sure we have widespread New Zealand ownership. We’ve always been upfront about that. There is a tension. But we would not have the mandate that we got at the election if we had proposed that..."

It's fascinating to burrow into that. For a start, I'm not sure how upfront they've been about that trade-off and tension. Do New Zealanders realise we're accepting less for the assets this time round? I think not.

Second, the reason National MPs chose not to sell to a single buyer is that they thought it could cost them the election. As it stands, National says it has a mandate because it won the 2011 election even though polls show the majority of New Zealanders oppose the sale. And on that point, I agree.

But Ryall is suggesting that selling to a single buyer - probably a foreign corporate - would have lost them the election and the chance to sell anything at all.

You might say that instead they listened to the public and designed a policy that was unpopular, but not so unpopular as to cost them power. Or you could go further and say that National is accepting a lower price for our assets because it suited their political ends, not our economic best interests. That just seems wrong.

And what was the key "trade-off" needed to keep people happy (enough)? The fact that the assets could be bought by New Zealand funds and, more importantly, Kiwi mums and dads.

You'd expect ACC to buy close to its 10% maximum portion, and if the Cullen Fund sticks to its index it will end up buying about 4% (although it may well make an exception and go higher in this case). KiwiSaver funds and iwi will take a decent share. So a fair share is likely to stay in New Zealand for the medium-term, as Ryall says.

But let's be straight. There's nothing in the bill that keeps that 49% share in New Zealand hands - not inf five years, 10 years, or my life-time. No incentives, no guarantees. So is that a smart trade-off? We've sacrificed profits to get National elected and place most of the shares in New Zealand hands when the companies are floated. And after that, the shares could be owned by anyone in the world.

So in this trade-off we lose 49% of the companies and the best price, but we get... temporary New Zealand ownership that could be sold away when the price is right.

Doesn't sound like much of a trade-off to me. And most voters agree. It seems we're the ones getting a few beads and blankets while we wave goodbye to the money-making resources.

Winston Peters may just be onto something when he says this was the week that National lost the next election.

 

Comments (11)

by Andre Terzaghi on June 17, 2012
Andre Terzaghi

Dammit, the "return" on whatever fiction the accountants come up with as the "value" of the asset is irrelevant.

In considering whether to raise $2 billion by borrowing, or selling an asset, what matters is what someone will pay for the asset, compared to the cost of borrowing.

The return from a business, even an electricity generator, is still riskier than New Zealand Government debt. Therefore a prudent investor will only pay a price that gives a higher return from the asset than they will get from buying government debt. Look at it that way and it's blindingly obvious the income stream from the asset will be significantly higher than than the interest on the equivalent value debt. Even the current lot of Cabinet Ministers should be able to understand that.

Unless any of the following apply: there's a lot of mugs out there willing to way overpay for a part of an MOM SOE, under the MOM the SOE can jack its prices way beyond what they are now and significantly increase its return over what it would be as a pure SOE(and if I'm to be gouged for electricity, I'd rather the profits go to the government), the government is planning on something pretty shifty to use the "sugar rush" of the sales income to dupe the electorate again in 2014, or the government has a cunning plan sometime soon that will devalue the asset and wants to realise value now. I've got a real problem with anyone planning to take advantage of any of these scenarios.

It really looks to me like the real reason for the sale is effectively corporate welfare for the NZX and the sharebroker and trading community. And that shifting of the capital embodied in those SOEs from "asset" to (very temporary) "income" will allow them to further misrepresent their "economic stewardship" in 2014.

All of this is just looking at the business case for these electricity companies, and ignores the wider social, environmental, and national strategic issues that are inextricably entwined with how we generate and distribute our electricity. In these broader fuzzier issues, I see nothing whatsoever positive about selling off our power  generators.

I strongly disagree they won a mandate for the policy. 51.5% of the party vote went to parties opposed to the sales, and there's very clear evidence a lot of the National vote was in spite of, rather than because of the policy. They just barely won the ability to legally jam it through, not a mandate for this specific policy. There's a big difference.

And as a swinging voter, I'm worried that National pig-headedly doing something this dumb will make it too easy for Labour/Greens for the next three elections. I suspect the real backlash on this issue won't come until at least the first sale is done.

Now that I've had my rant, I do have to say I see no good reason for the government to own a part share of AirNZ. And if TVNZ is to have purely commercial goals and has no room in its charter for the likes of TVNZ7, then I see no good reason for the government to own TVNZ either.

by william blake on June 17, 2012
william blake

..and the silly buggers are spending that $2bn on a road of 'national significance' that gets the good people of Wellsford to the Puhoi tavern 5 mins quicker. 

 

by Chris Webster on June 18, 2012
Chris Webster

Tim: In ref to 'iwi' investment. On Q+A Matthew Hootton stated that 'there's waikato tainui that has a relationship with the waikato river which it will want to buy.

Waikato does not need to buy the Waikato River. Where Hootton got that from is unclear. What does he & you know that we do not?

Waikato's commercial arm TGH is so much in debt (almost on par with this National government) it is highly unlikely we the people would sanction buying shares in something (we) citizens already own. It may well be that some kind of relationship exists with MRP but exactly what is unknown.

Hootton also claimed: 'I mean you get to sort of 80% to 90% quite easily of either government or Maori groups will end up owning these shares'. Really?

Which Maori groups? There is little public debate or knowledge 'Maori groups' are at all interested. In 2011 Tuku Morgan was gung-ho about spending tribal money & referred to an agreement which he said gave Waikato the first right of refusal over the Huntly power station. Those comments in turn lead to media speculation that 'tainui could head queue for MRP shares'. No substance. No proof.

Just speculation. As stated above TGH is in debt to three banks. It has maxed out its draw-down provisions. TGH has bold & expensive plans for Ngati Wairere's homelands @ Ruakura. Waikato people within Waikato are hardening their position on any further frivolous spending or investments. What will be vital is for really hard questions to be asked & answered on the back of a business case to include a full risk analysis before a decision is made whether to invest or purchase.

by Tim Watkin on June 18, 2012
Tim Watkin

Chris, these kind of reports indicate iwi being interested in buyng share; Solomon has said as much to me. They fit perfectly into an iwi portfolio, given they're long term and the core of the businesses – rivers, power stations, steam and the like – can't be moved offshore.

But otherwise not sure what Hooton was referring to re Waikato River.

 

by Tim Watkin on June 18, 2012
Tim Watkin

Andre, for me you're right in the middle, but wrong at the start and end.

Of course the return matters. If the things aren't making good money, why from a financial point of view would anyone want to keep them, or to buy them? What 'someone will pay' for the asset is largely dependent on what it's returning. Then there's the question of opportunity cost for the government/taxpayers.

I agree there's an element of corporate welfare for our poorly performing NZX and investment sector – of course the government wants to bolster these, but by handing over its best earners?

And yes, the sale of power companies means a loss of control when it comes to the public interest. Remember in 2009 Brownlee ordered the companies to hand over assets to each other to help stimulate competition? Won't be able to do that now without the directors for the 49% wailing and moaning. And if the companies start planning things that are in their commerical interests but not in NZ's interests (say, closing down power stations and threatening security of supply), how do they act?

I think the mandate's a red-herring. Well, it may yet become an issue politically with the referendum if the numbers are overwhelming. But if a government controls a majority in parliament, it's allowed to pass laws and, y'know, govern. That's the bottom line and if you don't like it you'll have to redesign our whole democracy, not just oppose the decisions you don't like.

As for Air NZ and TVNZ, surely it's important they stay in public hands because they're long-term strategic assets, not just commercial outfits.

by Andre Terzaghi on June 19, 2012
Andre Terzaghi

Tim, the point still remains that whether the current return from the assets is 16.5% as you've used, or 2.5% (as I vaguely recall Jane Clifton claiming somewhere) is irrelevant as long as they are profitable, and saleable for their income stream. Using the "current return" just allows people who want to confuse the issue do so more easily (I'm not accusing you), because it's so easy to claim a high return if you want to keep them, or a low return if you're arguing to sell them. There's a lot of different ways of valuing these different assets, such as deprival value, historical cost basis, depreciated cost and so on. Most accountants could come up with justifiable numbers that would vary by a factor of ten or more.

Nobody with a shred of sense is going to sell an asset as low-risk as an electricity generator at a price that gives a return of 16.5% (please God, don't prove me wrong), similarly no-one with a shred of sense will buy an asset as high-risk as an electricity generator at a return of only 2.5% (unless you're confident of being able to do something to lift that return). Current return is relevant only if you're considering making similar new investments, or deciding the compensation of the people responsible for making the investments.

What a prudent lomg-term investor will look at is the income stream, which a much more concrete number to pin down, make guesses about how that income stream will change in the future (including capital gain), and choose a price they are willing to pay for that projected income stream and risk to that income. In choosing that price, they will compare it to alternatives such as lending to the government. I'll repeat, the return from these electricity generators is more volatile and riskier than government debt, so the income stream from the assets will be higher than the payments required to service the extra debt taken on to keep the assets.

Things get a bit more complicated if an investor can add significant value to an investment, such as Haier's stake in F&P, or potentially could happen with a loss-making enterprise like Kiwirail, but it's very hard to see how outside investors in the proposed electricity company ownership structures could add any value to the electricity generators.

To my mind, the social, environmental and strategic considerations of the power companies override the financial aspects of the proposed deal, but I don't expect the supporters of the sales to be interested in anything but the dollars argument. Since the dollars argument is so clearly and strongly in favour of keeping the power generators I find it very hard to understand why they are going ahead.

Selling off AirNZ doesn't bother me because I have vague recollections of a time when it was effectively completely private, and the aviation market in New Zealand seemed to run more or less OK. Remember, before the private geniuses that sent AirNZ belly-up had to get it bailed out by the government? It seems to me there's enough true competition in that market that the loss of any government influence over AirNZ won't hurt us, so it's purely the cash-flow argument. It doesn't look like a long-term strategic asset to me.

In my view, there is a strong public interest in having a public service broadcaster that is not entirely commercially driven. But the way the TVNZ charter has been changed to eliminate anything but commercial considerations, with the latest result of axing TVNZ 7, means that TVNZ as it stands now is not that long term strategic asset. Instead, the long term strategic interest is in broadcasting infrastructure (Kordia?) and airwave channels. If you have access to those, the barrier to entry for a new public service broadcaster is very low. And it may be in a few years the public service broadcaster may be internet-based rather than old-school TV.

So the only question to me is whether now is the right time to flick off a purely commercial outfit, or keep it for the cash-flow. And personally I'd keep both TVNZ and AirNZ, but I find it hard to get upset about selling them.

by Tim Watkin on June 19, 2012
Tim Watkin

But, but, but... Andrew, the return on capital involves the 'income stream', so I'm not sure why you're drawing such a hard anf ast line between the two. Prudent investors use all sorts of measures, not just income, and ROC is certainly one of them.

And why I latched onto the 16.5% figure is because it's an average across all five companies and over TEN years. So it's not just 'current value', as you say - the timeframe involves tells you that they're profitable even through volatile times.

I'm not sure I buy the Air NZ arguments. It was in those times of private ownership that the thing almost went broke and required a taxpayer-funded bailout exactly because it's a vital strategic asset. if we can't afford as a country to lose it and will pay many millions to rescue it, that's a pretty strong argument to keep it in public hands.

Fair point about TVNZ, but times and politics can change and so could the way its run. But future govts have no way of changing that if they no longer own it - hence the 'long-term' mention.

 

by Andre Terzaghi on June 19, 2012
Andre Terzaghi

Man I'm doing a crap job of explaining my point.

When considering whether to sell an asset or borrow money, my objection to using the percentage return on some historical measure of capital is that the historic measure is subject to all kinds of manipulations by accountants, and the historical cost is meaningless to buyers (unless there's an opportunity to grow the business by making very similar new investments). At the moment, there's around about a factor of 2 from the highest to lowest estimates of the asset values between Treasury, the government, and the management of the companies, illustrating the inaccuracy of historical accounting measures.

On the other hand, the dividend and reinvested income generated by the companies, measured in absolute dollars, is much easier to pin down, and will be the main measure looked by potential passive shareholders (the mums and dads), some of the other factors being what the share price and income stream are likely to do in the future, the volatility of the return, and the risk of losing a significant part of the capital.

From the viewpoint of buying in to a company, the capital input is precisely fixed at the point of purchasing the shares, and that's the capital an investor will measure return against. That's very different to the running total of accounting adjustments made over the lifetime of a company. So for a new investor, it's a much simpler equation.

Consider a not-quite-hypothetical couple (not me) with $100,000 to invest. They've got moderate risk appetite, would prefer a low-maintenance investment, but have been recently burnt by apparently reputable companies (they're savvy enough that they stayed well clear of finance companies and their ilk but still got burnt). They could invest it in the government and get a return of around $3500pa. They could stick it in a term deposit at a major bank for a few years and get a return of around $5000pa. They could invest in Mighty River Power, but what kind of return would be needed to make that attractive? If they're in the right frame of mind, and the pain of recent burns has receded a bit, they might accept a dividend stream as low as $5000pa, with an expected capital gain from rising power prices compensating for risk and volatility. Certainly if the shares went on offer at a price giving a 16.5% return (with or without capital gain), they'd be selling off other assets as fast as possible to buy as much as they could.

So from the government's point of view, if it wants to raise $5 billion, it can either borrow the money at 3.5% and pay interest of $175 million a year, and watch inflation effectively devalue the principal owed, or it can sell some assets and lose dividend income averaging at least $250 million a year which is likely to increase at least in line with inflation.

The historical costs and capital sunk into the assets don't appear anywhere in the assessment, either from our hypothetical mum-and-dad or the government..

That 16.5% return (which I find more likely than 2.5%) certainly tells us that those were good investments for the government to make, and it also tells us there's a good chance those companies were run well over that timeframe. It just tells us nothing about the relative merits of keeping or selling.

At the time of the AirNZ bailout, I thought it was probably more in New Zealand's interest to let it go under. Seemed to me the bailout was motivated by simplistic nationalism, and the Labour government being a sucker for "saving jobs". As it has turned out it was a good financial move by the government to save it, so I wuz wrong. But the continual churn of new entrants and exits in New Zealand's aviation market tells me there's not much barrier to entry. If AirNZ were to suddenly disappear other players would very quickly fill the gap and as customers we'd hardly notice what had happened. Which is why I don't consider AirNZ a strategic asset, although I do consider it a well run company that contributes a lot to New Zealand and I'd rather the government didn't sell it off.

by Matthew Percival on June 19, 2012
Matthew Percival

A number of points to make so I'll try to be brief (and will probably fail).

The cost of borrowing at the moment may be 3.5% but is that going to be the real cost? By the time NZ gets in a position to repay this debt there is a fair chance that interest rates are going to be higher than 3.5%. There is also the factor of compounding interest in the meantime as we are effectively being charged interest on interest for every year we don't make repayments.

Your argument regarding the non-payment of debt is a red herring. If the sale funds weren't being used for the purposes mentioned we would have to borrow more to fund these activities. I think your argument needs to be along the lines of we shouldn't be undertaking these activities and need to use the funds to pay off debt.

I haven't read all of Andre's piece but he appears to allude to the 16.5% figure being an anomaly. I imagine it's based on cost which is not especially relevant. What is relevant is the dividend/capital trade off. If for instance dividend income will decrease by $400mil and the sales net $7billion the investor will return 5.71% not factoring in price changes. That is a more relevant figure to this situation than the historical cost figure. I do confess it's a hard concept to explain.

I don't know if anyone has touched on the argument of the companies supposedly jacking up prices to return higher dividends under the mixed ownership model. It's an argument I've seen trotted out but I don't believe it is true. I'd love to know how many companies have changed dividend policy due to minority shareholders. I'd venture it's not many.

You also mention mum and dad investors and that they should be looking to pay off debt. I'll suggest the stereotypical mum and dad investor will steer clear of these investments and will stick with property.

Lastly you discuss the issue of foreign ownership. My information is that Contact Energy is 25% foreign owned. So if there is that much appetite among foreign investors for New Zealand utility stocks why is Contact only 25% foreign owned?

Putting on my investor cap for a moment these investments are not without risk. As an investor you are along for the ride. These types of companies are highly subject to regulatory change (although perhaps less so under the mixed ownership model) and you have next to no ability to influence the direction of the company.

by william blake on June 19, 2012
william blake

Oh come on the asset sales are just ideologically driven, National promised not to sell them in the first term and have sweetened the deal with the mixed ownership and preferential sales, in its second. It is somewhere between neo and paleo conservative, ie. what passes for centrist these days. 

I agree, for once, with Matthew, this discussion is about NOT doing other things. like not spending $11bn on fairly pointless, if not outright destructive, roading projects. If these projects were shelved we could keep the assets and have $4bn left to keep the rest of the country working.

 

by DeepRed on June 19, 2012
DeepRed

If the Govt really did practise what it preached, then it wouldn't be handing out $100m + to the companies involved in prepping the asset sales. So basically this has the whiff of patronage all over it. Draw your own conclusion from the who's who involved. Socialism for the rich if I ever saw it.

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