The Tiwai Point subsidy buys time, but ultimately is just the latest in a series of deals by governments of different strips that sees the taxpayers stumping up for political reasons. Will it ever end?

Damned if they did, damned if they didn't. That was the political reaction National faced whatever they chose to do about Tiwai Point. But I'm not sure if that made the final decision harder – or let them off the hook.

National yesterday announced they'd pay New Zealand Aluminium Smelters (NZAS) – mostly owned by multi-national Rio Tinto – a $30m subsidy to keep the aluminium smelter open. At the same time Meridian Energy concluded its new contract meaning the smelter would pay less – "a meaningful reduction" – for its electricity.

As it happened, Rio Tinto announced yesterday that its earnings in the first half of this year were $4.2 billion. That's down 18 percent, but puts the $30 million in perspective.

It also announced that it had abandoned plans to sell Pacific Aluminium, which owns NZAS because it couldn't find a buyer at a reasonable price.

Bill English said this was a one-off piece of business and the company should now get on and make the smelter viable. That is a statement of optimism, as the new deal makes it even easier for NZAS to close the plant. That could happen as early as 2017. On the other hand, maybe the smelter will stumble on for another decade or two and this $30 million will look like a worthwhile investment.

Opposition parties slated the hand-out of taxpayer dollars, which would effectively go straight into the pockets of Rio Tinto shareholders. If the $30 million only keep the smelter open and protects its 800 workers another three years, that's a subsidy of over $12,000 per job per annum.

You might say that's woeful short-termism. But the deal achieves two things. First, it gives the market more confidence in Meridian (its biggest power contract is settled) and allows the government to go ahead with the partial sell-off. Second, it buys time for the company to find a way to make the business profitable again, for the aluminium price to go up or for the New Zealand dollar to go down, or – at the very least – for Southland and the workers to make the transition out of what may be an industry that's just no longer viable.

And that's something. Because if the government had held firm and refused a subsidy, the Opposition parties would have damned it for not caring about Kiwi jobs. Labour would likely have made the same calculation as National in handing over some subsidy, in an effort to save jobs rather than prepare the company for sale.

Further more, the Key administration has again showed it values pragmatism over ideology. Those on the right of National will be grinding their teeth at this subsidy. A Don Brash-led government could hardly have condoned it, preferring instead the laissez-faire ideology that says Southland and those 800 workers should take the hit, if that's what the market demands.

Still, National was damned either way. Say no to the subsidy and be whacked for not caring about the workers and the struggling regions. Say yes and, well, you've seen the complaints in the past 24 hours. The luxury in that for National was that it could go ahead and to the politically expedient thing because it was going to take the blows either way. Now it can push on with its much more politically volatile asset sales programme – which is, ironically, one of the least pragmatic and most ideological moves Key and his gang have made.

The smelter deal sends two political signals. One, that National are hypocrites. Think back to how scornful the party was about Labour's decision to buy the railways off Toll Holdings.

This press release from 2008 shows then-Opposition Finance Spokesman Bill English damning Michael Cullen for his "blank cheque approach" to rail. English said:

"The purchase of the rail assets was all about politics rather than disciplined, targeted spending of taxpayer funds."

And then he went on to say Cullen had "gifted the Australian owners of Toll" millions in taxpayer dollars. Well, touche Mr English. Now you've gifted Rio Tinto's owners millions for essentially political reasons. Thing is, this is what governments of all stripes do – the expedient thing.

The only way this deal is a necessity, rather than a "nice to have" is the political 'necessity' for National to not come unstuck on its asset sales. And really, what sort of signal does it send to the markets? What does this deal say to any other struggling company that could do with a bail-out? What about a New Zealand company thatcould do with a reduction in its power bill to avoid making lay-offs? Where does it stop?

The reality is that NZAS got a special deal because it suited National's political purposes, and because it's BIG.

What sticks in my mind, though, is that this is just the latest poor government-business deal; our politicians always seem to get the bung end of any deal. Cullen over-paid to get KiwiRail; the SkyCity convention centre deal essentially breaks the law and sets some ropey precedents; and the Warner Bros Hobbit deal shafted New Zealand workers and made us look like a banana republic.

At least with those deals something was being built for the future. Cullen won back key infrastructure and the convention centre and films will contribute to the economy for years to come. But this deal simply holds the line, perhaps for as little as three years.

I guess the fact is that in the 21st century a small country is not in a strong negotiation position when it walks into a room with multi-national companies as rich – or richer – than the country itself. My hope is simply that our leaders could find a way to be a bit cannier when it comes to these negotiations.

So in all, on many fronts it's not a good deal. But on other fronts it's not a bad deal either. It's too soon to tell. And when you can argue things both ways like that, it's always going to politics that tips the balance. And the companies know that.

 

Comments (15)

by stuart munro on August 09, 2013
stuart munro

If the government needed to intervene to keep the smelter open, it should have provided a debenture or a mortgage, not a cash gift. This is a bribe, part of the normalisation of corrupt practices that characterise this government, which history will remember as being rotten to the core, and woefully inept.

 

by Matthew Percival on August 09, 2013
Matthew Percival

I can hardly believe Stuart Munro has found a right wing bone in his body to make a statement moderately against government intervention in the economy!

It is not the governments job to be propping up failing industries with massive subsidies and it sets a dangerous precedent. There are plenty of hard working New Zealand business owners doing it tough at the moment, slogging it out week after week and making losses. I'm sure they'd appreciate a slice of $30 mil.

This is sadly a deal of politics for the express purpose of making Meridian Energy a viable proposition for the Mixed Model Ownership float.

by Tim Watkin on August 09, 2013
Tim Watkin

It's tough though, isn't it Matthew? Because size matters. Do you just let such a big employer fail for the sake of an ideology? How big does the employer have to be before you intervene? Because there has to be a line somewhere doesn't there? Or would you not intervene to save even our dairy industry?

by william blake on August 09, 2013
william blake

Rio Tinto is BIG, and RNZ stated the annual profit was $40 bn not $4 bn Tim, either figure, why shouldn't a HUGE corporation grow a community bone in its body and share some of those profits with its employees in the bad times?

Or even more naively, when they leave can we ALL share the surplus CHEAP electricity?

by Tim Watkin on August 09, 2013
Tim Watkin

No, it was half-year profits of $4.2b I was quoting William, as per this report. And others.

You would think they might think about giving something back after all these years and the public money that's supported them. But they only think about share-holders.

by Matthew Percival on August 09, 2013
Matthew Percival

Yes it is tough Tim because around 800 people & families are affected. There is a human cost to not providing the subsidy but I find it hard to justify taking $30mil of taxpayer funds, some of which will end up as profit for Rio Tinto, and give it to one company to operate in what I believe is a dead end industry for 4 years.

It's a fascinating point you raise in relation to intervention in the dairy industry. It's a bit like comparing chalk with cheese because the long term future of the industry is at this stage at the opposite end of the scale to the smelter. If dairy required short term propping up that would be a matter for private equity and I see no reason why private equity wouldn't be interested.

by DeepRed on August 09, 2013
DeepRed

If a Labour led-government was in the same situation, it probably would have foregone Meridian dividends instead of bailing out Tiwai Point. It would have a similar net effect on the Crown's books, but it would have weakened the case for floating Meridian.

That said, anyone working for AgResearch or Hillside right now has the right to ask what Tiwai Point has got that they haven't. Being in the right electorate? Having the right connections?

by stuart munro on August 09, 2013
stuart munro

@ Matthew, perhaps you have confused my views with those of the politicians who consistently lead NZ into worse economic positions. The smelter is the lazy man's substitute for regional development.

A decent developmentalist economist would have identified the growth possibilities for Southland, and prioritised them in terms of cost and returns. $30 million could start 3-5 operations with decent medium to long term prospects - real jobs for when the smelter goes south. Rio Tinto didn't need the welfare payment. That was public money, and it needs to go to the public, or to benefit the public, not foreign corporates. Bill is supposed to know this stuff - he must be so ashamed of himself.

0.3% growth and 6.4% unemployment - cue applause - worst NZ government ever.

by Lee Churchman on August 10, 2013
Lee Churchman

First, it gives the market more confidence in Meridian (its biggest power contract is settled) and allows the government to go ahead with the partial sell-off.

Which seems to me to be the obvious reason behind this ridiculous giveaway. I find it hard to believe that National cares that much about the workers. I doubt that even a large number of National voters would care if the asset sales program were put on hold. I'd hazard a guess that National Party donors feel differently.

I agree, Tim. Compared to the relative sanity of its first term, this government is starting to look like one of those terrible, sleazy governments the former communist countries got saddled with their first time at the ballot box. I guess they're lucky that the current Labour Party has chosen to be led by a fence post. Although given the propensity of people to hold on to what they have during tough times, my guess is that National could be caught operating a slave racket and still get elected. 

by Philip Grimmett on August 10, 2013
Philip Grimmett

You contend  that Government Asset sales policy is the :-

" Least pragmatic and  most ideological  moves the Key gang have ever made?"  

Really!  I see asset sales as a very 'pragmatic'  move by Key and Co.  

Is selling your granny ideological or pragmatic Tim? 

Our government /Demockary is becoming /has become, an illusion. By some magical slight of hand/or mouth, we find ourselves in a land of democratic 'dreams'.  We are now a corporatocracy, called NZ INC. with its head office located in the beehive! Our MPs have become Corporate, non virginal hand maidens to business interests, above and beyond the common good of the people. It's kind of obvious folks. I suggest we should try being a representative democracy and reign in the unbridled power of the buck over all else. 

 

by Andrew Geddis on August 10, 2013
Andrew Geddis

Do you just let such a big employer fail for the sake of an ideology? How big does the employer have to be before you intervene?

Except, of course, the $30 million doesn't seem to have come with any job guarantees attached ... so we don't know how many it has "saved" (until any subsequent restructuring takes place and redundancies occur). And you'd have to bet that there will be such redundancies, given that the new contract with Meridian is for less electricity - meaning less production at the plant.

Note also that even in the unlikely event that all 800 jobs are kept, it's a $12,500 subsidy per job per year for the next 3 years - after which anything could happen. But by that time, Meridian will have been sold off. 

by Lee Churchman on August 10, 2013
Lee Churchman

Our government /Demockary is becoming /has become, an illusion.

I'm not sure I'd go that far. It seems they've just realised that not enough people care to hold them to account. Sometimes, it's hard not to agree.

by Jane Beezle on August 11, 2013
Jane Beezle

Reporting on this subject - including you, Tim - appears to be missing one crucial point.

You say that this deal "gives the market more confidence in Meridian (its biggest power contract is settled) and allows the government to go ahead with [its] partial sell-off".

But this deal is quite clearly the opposite.  It MUST negatively affect the share price of Meridian both for the float and in the long term.

Look at the down sides:

-- Rio Tinto can pull out by 2017;

-- The company has demonstrated a clear "pragmatism before community investment" approach that is unlikely to change;

-- Australasian aluminium smelters are being shed;

-- There is the possibility of a new regulatory system that will control power prices in favour of the consumer;

--  A number of power companies are on the block.  Given the choice, why buy this lemon?

-- The first power company float has hardly been a raging success.  Any responsible investment adviser would tell you that it is better to open up a bank account and put your money there;

So all up this seems to add up to a BAD outcome for the asset sales process.  With  other good investment earners in the sharemarket (such as Ryman), I for one would not even think of purchasing Meridian shares.

So why are the media not joining the dots?  Let's not leave it all to Rod Oram, people ....

 

by Matthew Percival on August 12, 2013
Matthew Percival

@Jane as a potential Meridian shareholder I'd rather they had the contract with Rio Tinto than not.

The MRP and Meridian shares are mature stocks and aren't going to provide a large capital gain. But they should provide a solid dividend income stream. I'd expect 7-9% and it's hard to find investments in that category.

The long term investor can handle a capital decrease of 10% with those sort of returns.

by Tim Watkin on August 12, 2013
Tim Watkin

Matthew, Jane's point I think is that the contract will be gone in a few years, power prices will fall, revenue will follow and finally so will the stock price. What capital gain? More likely capital loss? Tiwai is THE big customer.

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