On National’s asset sales debacle

The concession by Finance Minister Bill English that National may not get the $5-7 billion it expected from its asset sales programme is a hammer blow to the government’s credibility. A less charitable view would be that having made an ideological commitment to the sales process, English is now talking down the likely sale price that the corporate sector will have to pay for getting their hands on them.

That’s the bind the government has always been in with this idiotic policy. For political reasons, English has to set the asking price for the assets low enough to allow a few more Kiwi contenders into the bidders circle. As soon as he does, this means that far more New Zealanders – ie, the 90% of Kiwis who don’t invest in the sharemarket – will no longer be getting the best price for the assets they have built up over many decades. That’s the same thing that happened to state assets in Russia in the 1990s. Ask a price that reflects the true value of the assets, and only foreigners can afford them. Set the price low and it becomes a fire sale of public wealth to your favourite oligarchs.

The admission by English is very damaging. Last week, Labour got slammed (justifiably) for its initial inability to explain how its election costings stack up. In the end, the alleged $17 billion hole in Labour’s books came down to quibbling over a $300-400 million shortfall, which is little more than a rounding error in the overall context of the government accounts. The gap between $5 billion and $7 billion however is far more serious, especially since National has already banked the likely returns in its election costings, and earmarked them for spending on new schools and hospital running costs over the next five years. All round the country, teachers and nurses should now be picketing John Key, and demanding he show them the money.

All along, National has known all that the selldown process was intrinsically fraught, and not just because of uncertainty in the global economy. If the selldown begins next year, it will be in a depressed climate where no-one here (or overseas) will be able to afford to bid top dollar. The government’s sales process is also likely to come after the Trade Me offering to the market, which will soak up a lot of the available small investor funds.

So far, the commentariat has overlooked the fact that National’s asset sales programme involves the selldown of four energy companies – either in pairs, or one after another. This is entirely too much of a similar thing, and that fact will also depress the selling price. One truism of investment strategy and security is that you should diversify your portfolio.

“But what the government is proposing,” business commentator Rod Oram pointed out on Werewolf a couple of months ago, “ 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.” Thus, the likely return to the taxpayer from the later sales in particular seems bound to suffer, amidst this excess of familiarity.
Right now, the government is peddling a wildly unpopular asset sales policy that makes little economic sense. That’s because the proceeds won’t be used to reduce debt, but will be frittered away on daily running costs. The full dividend stream will be foregone in perpetuity, when borrowing to cover the short term need is a cheaper, more sustainable option. The selldown generates no viable economic returns – not even from the bit earmarked for irrigation, where Cabinet papers show the estimated returns to be only 6.4% – apart from oh, some spurious, ideologically based claims that the selldown will enhance economic performance. (Thanks, but the state energy companies are already performing really well, and Air New Zealand is hardly a poster child for the economic blessings of privatisation.)

To cap it off, the government is taking this suicidal route in a context of a depressed local market, and when the international scene is in turmoil – thus all but guaranteeing fire sale prices for some of the country’s blue chip assets. That’s even before we start to measure the likely impact of further privatisation of the electricity system on the voter’s power bills.

So…if English doesn’t really know what the returns will be, does he have a reserve price for these assets where he will withdraw them from the market – and if so, what is it? What’s his bottom line for say, Meridian? Just asking.


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