Ten Myths About Asset Sales

Ten Myths About Asset Sales

Selling down the public’s stake in energy companies and Air NZ makes little sense, socially or economically

by Gordon Campbell

The rich can be surprisingly flexible. (It is their subordinates and political flunkies who tend to get religion, and cling to economic dogma.) Thus, in recent weeks, some very high profile members of the business elites in France, Germany, and the United States have chosen to campaign publicly for their governments to impose higher taxes on the rich. We’re talking about billionaires like Warren Buffett – who recently told the New York Times that it is now high time for governments to stop coddling the wealthier members of society:

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. {People like him, Buffett explained, face an effective tax rate of only 15% ] These blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places…But it is time for our government to get serious about shared sacrifice.

A month ago in France, a group of sixteen billionaires

wrote an editorial in the Le Nouvel Observatuer news magazine calling for higher taxes to be levied on the super rich. Among the signees were the L’Oreal heiress Liliane Bettencourt, Christophe de Margerie, of the oil group Total, Frédéric Oudea, head of France’s second biggest bank Societé Générale, and Jean-Cyril Spinetta, president of Air France-KLM.

In Italy, it has been much the same story. Luca di Montezemolo, Fiat’s CEO, has recently explained why he thinks business leaders like himself should be paying higher taxes, especially during a time of austerity and belt tightening. His rationale applies equally to New Zealand:

“You have to begin by asking [sacrifices] of those who have most,” di Montezemolo says, “ because it is scandalous that it should be asked of the middle class,” In Germany, the tax-us-more movement is called The Wealthy For a Capital Levy and 50 of the country’s business elite have so far joined up. The motivation , according to the group’s millionaire spokesperson Dieter Lehmkuhl, is the growing recognition that the current slate of economic policies are creating levels of income inequality that are neither socially nor financially sustainable.

Of course, the rich could always give their money back. Yet individual acts of charity will not raise sufficient revenue, Lehmkuhl and his associates argue, to make a significant difference. Only higher taxes on all high income earners and all sources of wealth will do the trick.

The point of laying out the evidence for this trend is that it marks such a spectacular U-turn from 1980s dogma. Remember when lower taxes on the rich was supposed to generate such a tide of prosperity that everyone’s boat would be lifted? Well, that hasn’t been the only Chicago-school doctrine to be contradicted by reality. In New Zealand, which is simply too small for classically competitive markets to develop and flourish, the devotion to free market principles was always dubious, and has become less credible over time. To the point a few weeks ago, where business analyst Brian Gaynor could lament the measurable decline of entrepreneurialism in New Zealand:

In December 1986, all of the 10 largest companies had private sector origins, and most were named after their creators. Top 10 company founders included Ron Brierley, James Fletcher, James Wattie, Bob Jones and Frank Renouf. Chase and Equiticorp were also dominated by individuals, Colin Reynolds and Allan Hawkins respectively.

Thirteen years later only Carter Holt Harvey and Brierley Investments remained in the top 10….The latest top 10 list, based on Wednesday’s closing prices, includes six former publicly-owned companies; Telecom, Contact Energy, Auckland International Airport, Vector, Port of Tauranga and Air New Zealand.

It could be argued that only Fletcher Building and Ryman Healthcare operate in a truly competitive environment as SkyCity owns a monopoly casino in Auckland and SkyTV has created its own monopoly because of weak competition. These top 10 sharemarket value figures show that New Zealand businessmen and women have lost the ability to create great companies, and the domestic sharemarket is now heavily reliant on former publicly owned organisations.

In the process, our private sector is becoming more – and not less – dependent on the state. In that respect, the Key government’s asset sales programme looks like a further confession of failure. Allegedly, the proposed round of partial asset sales will enhance the quality of our sharemarket. Even if it succeeded in doing so, selling down the public’s stake in state energy companies in order to improve the investment options for the small minority who engage in sharemarket speculation hardly seems kosher – and especially when, as a final insult, the transaction costs of this exercise will be recouped from consumers via their power bills.

Few people with a sense of the country’s history would expect much different. Why would a state sector that has built the roads, the railways, the export trade in agriculture, the forestry and tourism industries, the telecommunications infrastructure, the banking system and the Superannuation Fund – not to mention doing the vast bulk of our scientific and industrial research – be expected to learn very much from a private sector that in the past 25 years has done little more than buy, sell and cannibalise the pre-existent store of state assets?

Regardless, the warning signs have been given. The government has announced that if re-elected in November, it will sell up to 49 per cent of the public’s current stake in the Solid Energy, Meridian, Mighty River Power and Genesis energy companies. It also plans to sell down the public’s current 74% stake in Air New Zealand, the national carrier that is vital to the wellbeing of our tourism and export industries, and of our provincial heartland. Asset sales are expected to play a significant role in this year’s election campaign. It seems worth examining some of the myths about them..

1. Asset sales will reduce debt and help the government to balance the books .

Selling all or part of a public asset is one option for raising funds to pay off debt. It provides only a one- off benefit, though. The alternative would be to keep all of the asset, retain the strategic planning advantages this affords, and reap the dividends over time. Unfortunately, the government has never put on a white board the net long term benefits of both options – vis a vis the cost of borrowing to repay debt – so that the public can make informed choices about what they’d like to see done with their assets.

On the evidence, the state energy companies have been high value performers. Air New Zealand has also done reasonably well, considering the impact the global recession and high dollar is still having on tourism – let alone the effects of the Christchurch quakes, the earthquake/tsunami and nuclear catastrophe in Japan, and the surge in oil prices. Despite all that, the airline’s after tax profit of $81 million was still almost identical to the year before. Long haul international travel however, continues to be a drain on Air New Zealand, with the company reportedly losing $1 million a week for the first six months this year, on those long haul routes.

Since fuel constitutes about 55% of its costs on such flights, Air New Zealand has its fingers crossed that it will still be able to take delivery in 2013 of a fleet of fuel-efficient Boeing Dreamliners for the long haul runs. More immediately, it clinched in May a new (and less risky) way of expanding into Australia by investing in a 15% stake in an alliance with Virgin Australia. This investment will hopefully allow it to combat competition from Qantas on the trans-Tasman route, and could even enable it take some business from Qantas on those long haul flights to and from the US. Judging by recent share prices, the government can expect to raise about $300 million from selling down its Air New Zealand stake from 74% to 51%. All up, the partial privatization of state assets envisaged is expected to generate $5-7 billion, with the sell down in Meridian alone accounting for about half that figure.

Yet…..why would any government want to sell down these jewels in the crown ? Why indeed. Early this year, the financial analyst Bernard Hickey examined the value and earnings that government is currently reaping from each of the energy companies that it now wants to put on the auction block – and after comparing those figures to the cost of retiring debt via borrowing, Hickey concluded that sell down being proposed was a losing game.

Meridian Energy returned NZ$353.5 million in dividends to the government in the year to June 2010 and shareholder equity was valued at NZ$5.07 billion, which suggests a raw dividend yield of 7%. It reports its return on average equity at 3.9% and its underlying return on equity of 19.8%. Here’s the annual report.

Mighty River Power reported an average return on equity in the year to June 2010 of 9.7%. It paid dividends of NZ$286 million and shareholder equity was valued at NZ$2.688 billion, which suggests a raw yield of 10.6%. Here is its annual report.

Genesis Energy paid dividends in the 2010 financial year of NZ$39 million and shareholder equity was valued at NZ$1.448 billion, giving a raw dividend yield of 2.7%. It says it achieved return on equity for the year of 4.9%. Here is its annual report.

Solid Energy paid dividends of NZ$54 million in the 2010 financial year on shareholder equity of NZ$436.8 million, delivering a raw dividend yield of 12.4%. Solid Energy and reported profit as a percentage of shareholder funds at 15.4%. Here is its annual report.

Hickey then totted this all up. Collectively, he estimated, the four SOEs potentially up for partial sale generated total dividends last financial year of NZ$732.5 million and shareholder (government) equity stood at NZ$9.642 billion. “ This implies a combined (and very raw) dividend yield of 7.6% last year. Yet the government is currently having to pay around 5.5% for the new debt it is selling, mostly offshore. So on the face of it the government is a net loser by selling half of these state assets, and avoiding having to raise new debt…”

For related reasons, business commentator Rod Oram is also skeptical about the alleged economic benefits of the asset sales programme. “It is incredibly straight forward,” Oram told me. “Basically what the government is doing is taking its capital out of productive assets – and very good productive assets in the form of SOEs – and putting it largely into [economically] unproductive assets. The one exception I’ve identified so far is the money they’re proposing to put into irrigation.” Even that, he says, has been assessed by Treasury as not delivering a particularly good return on investment overall, outside of Canterbury. “And lower than they would get from the SOEs.”

Clearly, Treasury will need to demonstrate the wisdom of Solomon (not usually its strong suit) next year when figuring out the book value versus the market value of these assets. Not only will Treasury have to wiggle the figures to ensure that asset sales (and not further borrowing) come out looking like the healthier option. Ultimately, Treasury’s valuation will also dictate how many New Zealanders can afford to be bidders – and therein lies the paradox. If, for political expedience, the value of these assets is set low enough to allow more Kiwi contenders into the bidders circle, the result will mean that far more New Zealanders will not be receiving the best price for assets they have built up over many years. Expect some very creative accounting.

The problem, Oram concludes, is that the government is using the money from the asset sales process to slightly reduce its medium term debt and will save some interest costs by doing so – yet according to Budget documents, only by the order of about $100 million. At the same time, it will be foregoing a larger share of dividends from the SOEs. “The problem is, once you sell the companies you can’t get them back. Whereas, if you’ve used debt to build schools and hospitals– which have a real intergenerational value, and the costs of should be shared inter-generationally – you can actually pay down that debt…”

More so than in almost every other country in the OECD, Oram points out, the ebbs and flows of government finances in New Zealand are tied to the swings in the business cycle, and the current imperative to sell assets strikes him as a good example. “Yes, the government is right to be cautious about debt. But I think it is foolish to be so consumed by that medium term debt track, as Bill English is, that they start making bad decisions. And this is a bad switch of capital on spurious grounds, that it will improve the performance of the companies.”

2. Asset sales will create an opportunity for ordinary New Zealanders – the so- called “Mum and Dad investors” – to own a stake in some top notch companies.

The obvious rejoinder is that every New Zealand taxpayer already owns these top notch assets, and that stake will now be diluted and sold off to a mixture of local and foreign buyers. Those New Zealand private investors who can afford to reap the benefits will be anything but ‘ordinary” folk and/or everyone’s typical “Mum and Dad” –given that market analysts estimate that barely 10 % of New Zealanders currently invest in the sharemarket. Even if these new and enticing prospects kick that figure up to 15%, we’re still talking about an elite group of “ordinary” Kiwis – and by and large, they will be the sort of Mums and Dads you’d be more likely to run into down at the tennis club, than on housie night at the RSA.. In sum, a stake currently owned by many will be sold off to the relatively few. On past history (see below) even those anything-but-ordinary Kiwis don’t tend to hang onto their shares for very long.

To date, a less publicised aspect of the asset sales programme is that four energy companies – either in pairs, or one after another – could easily become too much of a similar thing. One truism of investment strategy and security, Oram points out, is that you should diversify your portfolio. “ But what the government is proposing is do is to sell into the market a large number of electricity generators.” At first, any portfolio manager currently holding Contact Energy shares may well sell them and buy into Meridian – but then along comes Genesis, with more of the same in its wake. Would many investors really want shares in two electricity generators – much less in three or four? “ Any retail investor would be a making a seriously bad mistake,” Oram believes, “ to end up buying shares in more than one electricity generator. From a portfolio point of view, it would be a very bad strategy.” The likely return to the taxpayer from the later sales in particular seems likely to suffer, amidst this excess of familiarity.

3. Asset sales will help boost the appeal of the New Zealand sharemarket as a place to invest.

Yet again, one has to query whether existing public assets should be being used for this purpose, to enhance the appeal of investing in shares. Shouldn’t the private sector be creating new enterprises that attract investors? Isn’t that how capitalism is supposed to work?

The reality is that the stock market in New Zealand has been on life support since the crash of 1987, and barely grown at all in the interim. Moreover, as some punters have already pointed out, one reason why the New Zealand share market holds relatively little appeal to investors is because it contains so many low performing companies, exhibiting few vital signs of life. As Goldman Sachs strategist Bernard Doyle pointed out to RNZ in early September, only 15 years ago the stockmarket was worth 56% of the overall economy, but is now worth less than 30 %.

Rather than re-invigorate the stock market….isn’t it (just as) likely that over time, those fine state-owned companies will be dragged down the same path of the undead ?

If so, the government would be likely to extend a helping hand. As Doyle also pointed out, it is always helpful to have a cornerstone shareholder who will stick around to mitigate any risk being run by the private investor. In one of the examples Doyle gave, the Superannuation Fund had played just that cornerstone role in Infratil’s joint acquisition of Shell’s petrol stations and downstream assets in late 2009.

In future, the state will be playing the same unlovely role of propping up the proposed asset sales programme, in order to reduce investor risk. A government that bailed out the people who gambled and lost in the late Alan Hubbard’s dealings is probably just as likely to stick around to resolve any future problems faced by investors in the energy companies and in Air New Zealand – where there is already a track record of government coming to the rescue when private owners lose the plot. What taxpayers should perhaps be feeling annoyed about is that having already bought Air New Zealand twice, they are now being invited to buy it a third time – while still functioning (in their role as taxpayers) as the ballast and virtual guarantors for any foreigners or major local corporates who want a crack at the profit stream.

Until this unholy scheme comes to fruition next year, an immediate benefactor of John Key’s asset sales programme would appear to be Mark Weldon, head of the New Zealand Stock Exchange. Recently, the Standard website carried an interesting article and graph showing how the value of Weldon’s extensive shares in NZX appears to have risen since the announcement of the asset sales programme. “Mark Weldon has been pushing for asset sales for some time, “ the Standard noted dryly. “ He owns more than 6 million NZX shares. No wonder Weldon is smiling – that’s not a bad capital gain of $6 million in nine months.”

As mentioned, these partial floats will primarily be one-off sugar hits for the stock exchange. The underlying decline in private enterprise will not be resolved by the asset sales programme.. If anything, the process will increase the proportion of top New Zealand companies that owe their origins to the work, initiative and funds put in by the state, and ordinary taxpayers.

4. Asset sales will bring private sector disciplines and efficiencies to bear on the performance of these assets.

To some, the superiority of New Zealand’s private sector managers is an article of faith. Not even the real life example of Air New Zealand – which as mentioned, is back in government hands only because of the disastrous foray by the airline’s previous private owners into the Australian airline business – can shake the true believers.

Obviously, there are some very efficient private sector managers in New Zealand. As Oram pointed out in a recent Werewolf article, there are now firms in New Zealand that can remain globally competitive even when our dollar climbs over the 80 cents level against the greenback – when, only a few years ago, such a currency hike would have been curtains for almost all of them. The efficient firms and managers are still however, the exception to the rule. As Gaynor’s evidence indicates, the New Zealand private sector appears more competent at reducing wealth than generating it:

* In December 1986, all of the top 10 companies originated in the private sector and had a total sharemarket value of $20,712 million.

* Thirteen years later seven of the 10 companies started in the private sector and had a market value of $13,044 million.

* Today, only four of the top 10 have a private sector background and their sharemarket capitalisation is just $10,866 million.

Wealth going down. Time to consume more public assets.

5. The shareholding will stay in New Zealand hands.

No, not if the sale by the previous National government to a prior generation of “Mum and Dad’ investors is anything to go by. In January, Labour leader Phil Goff released figures showing that within six months of the Contact Energy sale in 1999, the number of shareholders had fallen by 34, 845. As of last year, there were only 80,911 shareholders – as compared to 220,000 immediately after the sale. The 51% majority shareholder is now Origin Energy, which is Australian-owned. Just over 75% of the shares are now held by a mere 20 companies.

Selling on their Contact Energy stake certainly did prove very profitable for Edison, one of the original foreign investors. In 2004, Edison sold its 51% stake for $1.7 billion. Not bad going, given that the whole company had been flogged off only five years previously for only $2.3 billion. Since then, Contact directors have also been big winners, with their fees reportedly rising from $270,000 in 2003 to $993,000 in 2010. One way and another, New Zealand electricity consumers are picking up the tab for that largesse.

This tendency for those fabled New Zealand “ Mum and Dad” investors to sell up their stake ASAP – even, or especially in those companies that have good long term prospects – is not exactly a revelation. We have done this for years. Here’s Brian Gaynor again, pondering this same mayfly tendency six years ago in the New Zealand Herald:

Air New Zealand peaked at 42,111 [shareholders] in 2001 but since then has fallen steadily. The decline has accelerated in the past twelve months.

Ironically the two best-performing privatisations have lost the most number of shareholders. Auckland International Airport is down from 65,411 since listing and….the Contact Energy figures indicate that New Zealand investors like to crystallise profits, even if their investment has great long-term prospects.

In 2011, here we go again. The politicians are promising to sell state assets to “ Mum and Dad” punters with their piggy bank investments – while knowing full well that the vast bulk of most of any little flutters on the stock market will be vacuumed up within a few months, or couple of years at most. On Budget day this year Finance Minister Bill English this year was promising that Kiwis will be ‘at the front of the queue’ when it comes to the asset sales investment programme. One might well query how, and for how long.

It is not as if the government is naïve, and unaware of the political risk it is running from being seen as flogging off Kiwi-owned assets either directly – or indirectly – to foreigners, or to local fat cats. As part of the smokescreen, this year’s Budget listed three possible ways (see Page 23 of the Investment Statement Supplement) to ensure that locals got that first and fleeting crack at buying back their own assets. These methods are listed as being :

+ a priority allocation, pre-registration, and instalment receipts

+ financial incentives, such as price discounts and loyalty shares and

+ hard ownership restrictions, such as individual or total ownership caps or separate domestic shares.

On paper, that last option might look like the safest way of trying to keep ownership in New Zealand hands – but it would almost certainly be incompatible with WTO trade rules that require the equal treatment of foreign investors. Probably for that reason, the government has tried a different tack – and sought to re-assure the public about the sales process in general – by touting a 10% cap on how much any one company can own. Theoretically, such a cap would prevent any single investor from being able to get a stranglehold in the boardroom. Crucially, since such a cap would apply equally to foreigners and locals alike and thus, would not be in violation of WTO investment rules.

Unfortunately, you could drive a truck through the spending cap being proposed. As has already been pointed out an investor could simply split their bid into three, four or five separate bids via shelf companies which New Zealand so readily enables, and these could then act in unison when it came to making electricity pricing decisions further down the track. To Phil Goff, the partial selldown is a mere ‘softening up prelude’ to an outright sale further down the track. One other way the government’s 51% controlling stake might be compromised – further down the track – would be if private investors sought to raise capital by issuing further shares, thereby diluting the government holdings. ( At which point, the New Zealand government of the day would need to spend more money if it wanted to stay in the driver’s seat.)

Foreign investors would prefer a more direct route to the goal of control. Even the Act Party (which supports privatization) has dismissed the 10% spending cap as a political ploy to temporarily re-assure the public – with Act leader Don Brash reasoning that most foreign bidders are likely to see an outright sale (ultimately) as the only logical reason for wanting to invest in the first place:

I suspect [the spending cap proposal] was put in place to reassure New Zealanders that large chunks of these assets won’t be bought by foreign companies or institutions. [But} I find it difficult to see why a foreign company would buy a large chunk of these assets, given the fact that the Government will retain a 51 percent majority.”

If Brash is right, then Goff is probably right as well. The government may well be inclined to entice foreign bidders by quietly holding out the prospect of bigger stakes – or an outright sale – further down the track. Regardless, Kiwi consumers will experience foreign investors and New Zealand investors as being much the same at the receiving end, anyway. It is not as if local investors would be willing to forego profits out of any sense of patriotic compassion for their fellow citizen’s electricity costs. Yes, local ownership matters when it comes to the current account deficit. But ultimately, being screwed over on your power bill by foreign investors will not feel any different to being screwed over by the modern Kiwi equivalent of Sir Michael Fay and David Richwhite.

6. Asset sales will increase the pool of national savings and investment.

Well, not really. A fair chunk of the proceeds from selling the family silver will go – unsustainably – into day-to-day running costs. According to this year’s Budget papers, the sell-down of state energy companies and the reduction of the shareholding of Air NZ is forecast to pay for one third of the spending envisaged on schools, health and government services over the next three to five years. To which many taxpayers would respond….why not retain them and use the entire revenue stream to help bankroll those same social needs for generations to come?

Moreover…as mentioned, if foreign bidders are made to pay top dollar for those assets (to ensure the public get a fair price) you can rest assured any costs involved will be retrieved, at some point. The more that investors are made to pay upfront, the more they will seek to recoup in higher power prices (and in cost cutting via reduced domestic services by Air New Zealand) over time. It is not as if the public has much leverage over these companies, or any real alternatives. When it comes to domestic air travel, the public is already facing an Air New Zealand that enjoys a near-monopoly position, with over 80% of this country’s air business and rising to close on 100% when it comes to flying in and out of provincial cities and towns. By pursuing higher returns from the selling down of its Air New Zealand stake, the government is virtually inviting private investors to exploit the airline’s near-monopoly local conditions in order to hike prices, and to reduce the quality of services. It is called profit taking – and as usual in New Zealand, it will be from a largely captive pool of customers.

7. This is a good time to sell state assets.

Let’s assume, for argument’s sake, that there is ever a good time to sell off stakes in our key publicly owned energy assets. Is next year a really good time to do so? Hardly. When historians look back at this period of economic history they will probably shake their heads in wonder at the counter-intuitive response of governments during the financial crisis. Given the belt-tightening climate, who would expect to get top dollar from a bunch of depressed local and foreign bidders?

As mentioned, the government has a political self-interest in ensuring a large number of local bidders, which almost certainly means the government cannot be trusted to drive a hard bargain, and seek a good price for these assets. This low-balling of the price is likely to be magnified next year by the competition for the scarce investment funds that the public has at its disposal. In a fascinating recent piece for the Dominion –Post, business journalist David Hargreaves has pointed out that the timing of the first of the energy company floats is not likely to be until October/November next year, with – for various stated reasons – Meridian and Mighty River Power being towards the front of the queue, and Genesis, Solid Energy and Air New Zealand going on the block somewhat later. As Hargreaves also points out, this means that Fairfax Media is likely to be quicker to market with its already-announced plans to sell up to 35 % of the online auction site Trade Me.

Ask yourself – when it comes to ordinary “Mum and Dad” investors, isn’t it more likely that the thousands of people who currently use Trade Me will raid the cookie jar for a piece of that action, rather than invest later in an energy company? In which case, the energy companies are more likely to become the investment-of-choice for canny professional investors who, as Hargreaves suggests, will have concluded that Trade Me may have passed its peak years. Thus, under the guise of keeping the share price within reach of “Mum and Dad” investors (who by then will have bought into Trade Me instead) the government will probably end up cutting the price it asks for the energy companies, to the very bidders who could have afforded to pay a premium.

Hargreaves is in no doubt which state energy company asset should be sold down first :

Market talk has suggested that Mighty River, valued at $3.7b, is likely to be the first sold. Your correspondent reckons that would be a mistake. It should definitely be Meridian. Meridian is the monster in the mix. Independent valuations last year gave the whole company – which owns seven hydro stations and five wind farms – a total worth of at least $6.3b. That means selling just under half of it through a stock market float would potentially take in over $3b.

If such an amount could be raised from the first asset sale it would take a lot of the financial pressure off the later sales. It makes sense for the Government to conduct the biggest sale first when there is a degree of novelty attached to the privatisation process.

Surely, there’s a logical contradiction here. If the scarcity value of good investment prospects on the NZ stock exchange is supposed to make it more likely these public assets will attract a good price – then equally, shouldn’t the advent of quality alternatives like Trade Me serve to push things in the opposite direction, and depress the price? And doesn’t that suggest that mid to late 2012 may actually be a very bad time to be trying to sell down public assets? Hargreaves deserves the final word:

[The] process needs to be done well. And competing floats such as Trade Me and possibly others still to be announced make the margin for error very slight. The government owes it to the public to get a good price for the partial sale of state assets. If it cannot guarantee that, because of market conditions or because there are too many other floats being conducted, then it should not hesitate to delay the sale process.

8. We have to sell state assets now, to pay off debt.

Not proven. This late in the game, it has still yet to be established that New Zealand’s debt position is so parlous that it is necessary to sell state assets. And as mentioned, it may well be less expensive to borrow to pay the debt until the recovery arrives and those debts are repaid – with the help of the entire profit stream from those assets.

Most of New Zealand’s debt problem has been incurred by the private sector. Government debt – which surely, should be the only reason for selling publicly-owned assets – has remained low by international standards, partly because the previous government used the fruits of the economic boom to pay off government debt. As a result, New Zealand entered the global depression with its government finances in a far better condition than many, many other OECD countries. Conclusion : we don’t face an absolute requirement to sell down state assets in order to keep the rating agency wolf from the door. It is a decision being driven almost entirely by ideology.

9. Privatisation, either full or partial, is a driver of innovation.

Well no. In fact, Telecom was the poster child for the contrary view that privatization in monopoly or near-monopoly conditions is more likely to create an active dis-incentive to innovate, given that the incumbent will have every reason and opportunity to block the onset of the competition that is the true stimulus for innovation.

Telecom was never pro-active, and rarely an agent of innovation. By the mid 2000s, its use of its dominant position to delay innovation (and competition) had left New Zealand 22nd out of 30 OECD countries in broadband adoption, with high speed Internet uptake being only half the OECD average, while the cost of high speed business broadband was the second most expensive in the OECD. For a geographically isolated trading nation like New Zealand it was all but treasonous for successive governments ( and corporate fellow travelers) to allow the cost and access to high speed telecommunications to be exploited in this fashion. (Having apparently learnt nothing from this episode, the current government is once again bestowing similarly dominant powers on Telecom in the faster broadband package, but that’s another story.)

Within the partial privatization as envisaged for the state energy companies, things are not much better – not at least, for the consumer. That’s partly because the presence of private investors can be a useful rationale (or scapegoat) for any government wishing to maximize their own dividends, while minimizing the political heat from doing so.

The asset sales, Oram agrees, will not be a spur to innovation. The main one being that that the generators [Contact excepted] are in very good shape already and operating near the peak of their game – and even Contact’s current problems with its call centres and consumer relations are likely to be transitory. The fundamental aspect of these companies, Oram continues, is that they invest large sums of capital over long periods of time. “They can be innovative and creative to some extent, but their whole mindset, their whole culture is not that, and never will be. That’s because they are high capital, long term utilities. Meridian with all the best will in the world, did try to innovate with [energy efficiency] programmes like Right House, which was absolutely the right thing to do. But they’ve just sold it, because a utility is not the right place for something like that. By nature, these are not fantastically innovative companies. That’s a relative term, but they’re not going to spark a Silicon Valley.”

Thirdly, Oram points out, the government remains the dominant shareholder, and is likely to continue to lean on the company in the various ways at its disposal. In Oram’s view, “The government can’t dress this up and say that once they’ve sold a [minority] stake in them on the share market, that these will somehow be [transformed into] a different kind of company.”

10. The asset sales are consistent with the government’s energy planning.

Well no, they tend to negate it. Flimsy as it was, the energy plan eventually released by MP Hekia Parata in late August restated a target of reaching a 90 % renewables energy target by 2025, but without giving any tangible details of how the government proposes to reach it. At the same time it put out the welcome mat for the foreign oil exploration multinationals, and signalled that most of the government’s effort would be going into oil and gas exploration.

Arguably, the state’s roster of energy companies might have served as a useful springboard for developing renewables technology and putting it to work for the national good. By inviting in private investors, the more likely outcome is that their advent will create pressure for short-term economic gain from existing technology and market conditions. Given the inbuilt conservatism and long term lock-in of investment that Oram spoke about, the private sector imperatives appear likely to delay and deter the switch to renewables. Along the way, New Zealand will have further downgraded its chance of becoming a cutting edge developer and marketer of renewables technology to the rest of the world.

11. Asset sales are consistent with Treaty principles. No. The likes of Tainui executive Tukoroirangi Morgan have already jumped at the chance of iwi forming a consortium to pool some of their $36 billion of tribal resources and buy into the assets being lined up for sale. As the Waikato Times has reported:

It is no secret that Mr Morgan is keen for Tainui to invest in the energy sector, particularly through Genesis Energy and Solid Energy. During his speech yesterday, Mr Morgan said Maori could grow their substantial collective wealth through state-owned enterprises. He said such a move would be possible if Maori joined together through an economic consortium….

Such a consortium would be formed to participate in the partial privatisation programme outlined by the National Party. The stakes are huge and nothing is certain but we know from past experiments that, with the exception of rail and Air New Zealand, once these assets are sold they are gone forever.”

What is good for iwi may not be good for many other Maori. Over a short period of time, the Maui Street blog has established itself as a perceptive commentator on issues affecting Maori, and in February, the site carried this useful rejoinder to Morgan and Co :

Maori, rightfully, control huge tracts of forestry land, some important national resources such as geothermal steam, lake beds and some of NZ’s most profitable tourism ventures. Why not add to that list Air New Zealand and a collection of electricity companies….

But what would assets sales mean for Maori? Profit (in the medium to long term of course). But will that profit flow back to the people? I doubt it. Many iwi authorities adopt a top down approach when distributing wealth. Tertiary students, kaumatua and kuia, Marae, researchers and employees usually receive generous support. However the unemployed, the desperate and the dysfunctional – or in other words those most in need – tend to receive very little, or nothing. So profit becomes meaningless for those at the bottom. Privatisation also means social obligation to those less able to pay is lost. Therefore, social obligation to many Maori is lost.

As far as I am aware the only iwi with the means to participate in assets sales are Ngai Tahu and Tainui. So what we will see is a concentration of wealth in two of our largest iwi. The small players will be left to dabble in little tourism ventures and land rentals. Such an inequitable situation cannot be good.

As I said in previous post assets sales will most likely lead to a decrease in government services. Iwi, as major proponents of asset sales, have an obligation, albeit a small one, to step in and attempt to negate the affects on Maori as a result of decreased services. The problem is iwi lack the economies of scale required to deliver what government once did.

With all of the above in mind assets sales seem like a dumb idea.

During the election campaign, these two conflicting perspectives are also likely to be played out in the political realm – between the Maori Party, and the Mana Party.

In sum, selling the current stake in the four state energy companies and in Air New Zealand makes little economic or social sense. By default, the partial privatizations the government has in mind are merely the latest round of asset-stripping the New Zealand economy, almost entirely for the benefit of local and offshore investors.

It is not as if there are not alternatives on the table. Further borrowing and a strategy to stimulate growth to pay down the costs involved as the business recovery picks up pace is the traditional approach – and one that would be only a little more costly (if at all) than selling down the energy SOEs and foregoing a bigger share of the dividends from them forever more. In the run-up to the election, Labour and the Greens will also be advocating another alternative to asset sales, spearheaded by a capital gains tax and a more progressive top tax rate.

To Oram, if the government is intent on selling down its stake in state – owned energy companies, there is an equal argument for re-packaging them beforehand. “For me, the solution for the electricity sector – and before the government sells off all these companies – is to bring them back together. Because I think the competition between them now is ridiculous. The government is pushing the retail competition and this ridiculous churn among customers in the electricity sector. Too much time and effort is being spent in churning customers. It is a very short-lived strategy to try and drive prices down. But it has no long term future.”

Nor can electricity consumers expect any price relief from the asset sales process. Once the transaction costs of the sales process are added to the extensive capital investment needs facing the sector (and necessary in order to keep step with demand and security of supply) it is inevitable that power bills will rise sharply next year. “We can be sure that electricity prices are going to rise, “ Oram agrees. “ because there’s so much more investment that needs to be made in the grid and in new generating capacity….But having said that, we remain one of the cheaper countries in the OECD for electricity prices. So that may not be a major issue in itself. Except that we still have some large chunks of industry where the whole business model is dependent on abundant cheap electricity.”

Well voters will not be taking much comfort from how much higher the power bills may be elsewhere in the OECD. For now, the asset sales programme has the potential to become the main litmus test for the government’s second term – in that the sales will concentrate public hostility to selling off the nation’s heritage to foreigners while ( fairly or otherwise) copping much of the blame for the major price rises that will become evident on everyone’s power bill next year. That will not happen soon enough to swing a decisive number of votes at the election in November – but the subsequent backlash to the partial asset sales is likely to blight the government’s entire second term.


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