New ZealandL Asset Sales

Investing in someone elses’ future

Frank MacSkasy
5 August 2012
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Mandates

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Firstly, let’s cut to the chase and address John Key’s assumption that he has a ‘mandate’ from the country to pursue many of his Party’s unpopular policies, including state asset sales.
No, he does not.
As Bryce Edwards said on Radio NZ last year,
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Full Story
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As reported in the NZ Herald,

” Moreover, only an estimated 93.2 per cent of the 3,276,000 people who were eligible to vote were enrolled, so the 2,254,581 people who did cast their votes (including special votes) leaves just over 1 million who stayed at home. “

See: 1 million didn’t bother to vote
So doing a bit of simple arithmetic,

1. 2,254,581 people voted
2. 1,058,636 voted National
3. The population of New Zealand is approximated 4,430,000
4. 1,058,636 is about 24.5% of the entire population.
5. John Key’s “mandate” is roughly one quarter of  the country’s population.
   

The Nats can dress that  up any which way they like, but that’s not a mandate. That is  a minority in drag, masquerading as a “majority”.
But still a minority.
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National Conference

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Let’s cut to the next ‘chase’.
The recent National Party Conference in Skycity had nothing to do with conferencing or  the Party’s internal workings. It was purely and simply a public relations exercise  to raise “troop” morale and present National in a positive light to the public.
It was about appearing decisive and on-message. It was about strong leadership and confidence, reminiscent of Rob Muldoon, and Dear Leader played his part perfectly as he gave the rallying cry to his fellow MPs and Ministers.
Key thundered,

“Our policy of partial share sales is a win-win and I stand totally behind it.”

See: Labour, Greens hit out at asset share plans
After months of various scandals, resignations, disastrous flip-flops, and gaffes, the Party pulled out it’s “ace-in-the-hole” – John Key. “The Boss” laid down the law, and as Tracey Watkins from Fairfax said,

“No more tip-toeing around. That is the clear message from National’s annual conference, where the Government’s economic programme has been invested with a new sense of urgency.”

See: Damp protest shows heat gone from asset sales fire
Ms Watkins tends to present political issues  from a position favourable to National  and her piece on 23 July was no exception. But she also had a valid point – National was fighting back. They were on a counter-offensive on several fronts.
But as the dust settled, and the “whizz-bang-gosh!” factor faded, the public’s  momentary distraction returned to the issues and problems currently confronting us as a nation.
As much as Dear Leader might wish it, those issues and problems will not go away.
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State Asset Sales

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National is desperate to sell this lemon to the public as a going concern. Indeed, the issue was presented as one of several issues on a leaflet/questionnaire that the Parliamentary wing of the Party mailed out,
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The Nats are sensitive to recent public protests and an ‘insider’ advises this blogger that Ministers are tracking correspondence; internal polling; and letters-to-editors on the subject.
In an effort to “sweeten” the deal and to assuage public opposition, National is offering,

• preference to “mum and dad” investors
• a three year loyalty share-bonus scheme
• a minimum of $1,000 dollar share parcels
• a guarantee of shares to New Zealand investors wanting parcels of up to $2,000
• Treasury setting up a retail syndicate of share brokers and banks to help first time share investors potential investors.
  

See: Kiwis encouraged to take up SOE shares
National’s “carrot” is matched by it’s “stick”.  As Bill English threatened in June last year,

“We are saying that New Zealanders are at the front of the queue, but if not enough of them show up, it won’t be 49 per cent. I wouldn’t want to exactly guarantee every share but we have got to look at how to make that happen.”

See: ‘Buy state-asset shares or foreigners will’
So the message is crystal-clear; ‘If  we don’t buy these assets (which we already  own),  John Key and Bill English will sell our companies to overseas interests’. It’s like watching a rather bad, cheaply-made, B-grade gangster movie from the 1940s.
But the ‘rort’ doesn’t end there.  Treasury estimates that any loyalty scheme will end up costing taxpayers up to half a billion dollars. That’s because giving away free shares as a “loyalty bonus” still incurs a cost – nothing is for free,

” A “loyalty” scheme to sweeten state assets sales for investors could cost the taxpayer $500 million – more than $100 for every man, woman and child in New Zealand – according to Treasury numbers.

[abridged]

In a report to the Cabinet last year, the Treasury said incentives to encourage local investors to buy shares “typically range from 5 to 10 per cent of total value ($250 million to $500 million based on a $5 billion programme)”.

The Government says it expects to raise $5 billion to $7 billion via the sales programme.

Based on the Treasury’s $500 million upper estimate of the cost of a loyalty scheme, the forgone revenue works out to just under $113 for every man, woman and child here. “

See: $112 a head for asset loyalty
Labour Leader, David Shearer summed it up thusly,

” Effectively, the taxpayer will be paying for a loyalty scheme that a small number of New Zealanders who can afford to buy shares will be able to enjoy. It’s clear there’s some real winners here, and the losers are most New Zealanders. “

Based on the Queensland experience where Queensland Rail was privatised in 2010;  where  a share-bonus loyalty scheme of 1:15 shares was used; the cost to Queensland taxpayers would be $360 million, according to our  Parliamentary Finance & Expenditure committee. To which Key was reported as saying, that the figure was,

“… a possible number. I haven’t seen their workings so I wouldn’t want to agree with that at this point.”

Key’s comments were reported on the NZ Herald website at 5:30am, Tuesday 24 July, 2012.
By mid-day, on the 24th, he had changed his views from “ a possible number  “, to,

“These numbers that the Labour Party are coming up with and the Greens are farcical.”

See: PM: Asset loyalty won’t cost hundreds of millions
First point: that report on the Herald’s website was posted at 12:18pm on the same day;  Tuesday 24 July, 2012.  Not quite seven hours had passed before National’s spin-doctors had noticed Key’s blunder, and Dear Leader changed his stance.
Second point: the figures were not from the Labour Party, nor The Greens. They were Treasury’s figures.
Was this a deliberate attempt to undermine the credibility of those figures by shifting it’s provenance from Treasury to opposition parties?
Key then made this extraordinary comment,

“If you think about the entire float that could be in the order of $5 billion to $7 billion. Let’s argue that it’s $5 billion for a moment if you then turned around and said about 20 per cent of that could be for mum and dad, it could be more it could be less – but just for the purposes of maths that’s a billion. If you apply the Australian Queensland model that’s one in fifteen shares – that’s 6 per cent. Six per cent of a billion is $60 million for the entire programme.”

“20 per cent “?!?!
What happened to the 49% that Key and English have allocated to “mum and dad” investors,

“Counting the Government’s controlling shareholding, we’re confident 85-90 per cent of these companies will be owned by New Zealanders, who will be at the front of the queue for shares.”

See: Running up $5-$7b more debt not the answer
Was this an unintended slip from Key that National is counting on only 20% of shares going to New Zealanders?
And did he think that no one would notice?
Acknowledgement:  Cheer up Mr Key – Fairfax still love you
This is disengenuous of Dear Leader. On the one hand, National is claiming that 49% of shares will be allocated to local “mum and dad” investors – and on the other, they are calculating a bonus-share loyalty scheme on a figure of 20%. Key is shuffling figures around and quoting them to suit daily events.
This is not the first time Key and English have done this.
In January last year, when John Key announced National’s policy to part-privatise five state assets, he stated,

“If we could do that with those five entities … if we can make some savings in terms of what were looking at in the budget and maybe a little on the upside you’re talking about somewhere in the order of $7 to $10 billion less borrowing that the Government could undertake.”

See: John Key reveals plan for asset sales
The figure of $7 billion to $10 billion proceeds from a partial asset-sale then shrank,

“First, the Government gets to free up $5 billion to $7 billion – less than 3 per cent of its total assets – to invest in other public assets like modern schools and hospitals, without having to borrow in volatile overseas markets.”

See: Running up $5-$7b more debt not the answer
And finally, English confessed all,

“If we did get $6 billion, that would be a gain of sale [of $800 million] which is just a product of the accounting. I just want to emphasise that it is not our best guess; it’s just a guess. It’s just to put some numbers in that look like they might be roughly right for forecasting purposes...”

See: English admits his SOE figures just a guess
Key did precisely the same thing over the Skycity-convention centre-pokie machine contra-deal.
He advised the country that building a new convention centre (in return for changing the law to allow up to 500 additional pokie machines for Skycity), would result in up to 1,900 new jobs in Auckland,

“It produces 1000 jobs to build a convention centre, about 900 jobs to run it, and overall the number of pokie machines will be falling although at a slightly lower rate.“

See: Key defends casino pokie machine deal
Key’s figures turned out to be rubbish.  The true numbers were disclosed last month by Horwath Ltd director,  Stephen Hamilton,

” Horwath director Stephen Hamilton said he was concerned over reports the convention centre would employ 800 staff – a fulltime-equivalent total of 500.

He said the feasibility study put the number of people who would be hired at between 318 and 479. “

See: Puzzle of Key’s extra casino jobs
Key  had either made them them up out of thin air, or else he has some very poor advisors.
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Frustrated – Where to from here?

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And lastly, the sheer economics of the partial asset-sales cannot be  commercially sustained, as  BERL reported in May of this year,

‘The interim loss of earnings resulting from reduced dividends and the period of time before the new assets reap benefits is never recouped.

”Subsequently, the option of asset sales can only significantly improve the Government’s accounts if a set of assumptions are adopted that are at the extreme ends of plausibility.”

‘While the initial offering may be directed towards domestic purchasers, future private share transactions could increase the portion of shares [and earnings] in overseas investors hands.

”Such an outcome would lead to a further deterioration in the external deficit and external debt position.”

See: Asset sales will leave Govt worse off
Unbelievable.
Unbelievable that a number of New Zealanders still believe that National is a sound manager of the economy. These muppets couldn’t run a corner Dairy – they simply wouldn’t have a clue how much to charge for a packet of chippies.
No wonder Labour Leader David Shearer expressed his frustration at Dodgy John’s slippery numbers, when he said,

“We absolutely have no idea how much this loyalty scheme is going to cost New Zealanders. He was happy to go out and announce the loyalty scheme at the National Party conference but he’s not prepared to come out with the numbers now.”

See: PM: Asset loyalty won’t cost hundreds of millions
Either way, National is keeping information on asset sales secret – or they have no idea what’s going on. Conspiracy or cock-up – neither option is particularly reassuring.
The ground keeps shifting, and this blogger believes it is a deliberate ploy to deny information to sales-critics and the public. Without solid information, it becomes harder to mount a sound critique of National’s plans – though BERL has done a fairly reasonable job of it.
Accordingly,  this blogger invites “mum and dad” investors to exercise caution as shares are made available to the public,
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Full story
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A Possible Solution?

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As BERL stated in their report, selling state assets will eventually impact on the government’s balance sheet. Quite simply, any short-term gain through sales proceeds will  eventually be whittled away by reduced dividends from half of these state assets sold into private ownership,

” The interim loss of earnings resulting from reduced dividends and the period of time before the new assets reap benefits is never recouped. “

Plain english: we will  lose money on the deal.
Selling any of these State assets defies understanding.
As Treasury stated last year, the revenue stream is quite significant according to their own SOE Economic Analysis  that, “…on average, the SOEs have performed favourably when compared to the averages for the quartiles computed for the benchmark companies“.
See: Treasury SOE Economic Profit Analysis 25 November 2011
On average, Treasury show a 14.5% average shareholder (Government) return. Compare that to other investments, and it’s a fairly remarkable achievement for state enterprises which – according to free marketeers – are not supposed to operate more effectively than private enterprise.
See: Assets returning record dividends – Greens
In a further,  surprising turn of events, in February 2001, Finance Minister Bill English agreed, stating,

“Generally the SOE model has been quite successful in that respect.”

And even  went so far as to complain that they were making excessive profits! (There’s no satisfying the National Party!? They sell under-performing state assets, explaining that the “market will improve their performance” – and then complain when state assets are making too much money! Then the Nats will flog them off to reduce returns and make them more “competitive”.)
See: State-owned power returns excessive, says English
By contrast, Contact Energy – an electricity corporation privatised in 1999, and now mostly Australian-owned – retails it’s electricity at a higher price than it’s competing, state-owned rivals.
See: 226,000 shop for power savings
National has stated several reason for wanting to sell 49% of Meridian, Genesis, Might River Power, Solid Energy, and further down-sell Air New Zealand – but their   main, carefully-worded, rationale has been to “reduce debt/invest in new assets/infrastructure”,  according to Bill English,

“We are firmly focused on keeping the Government’s overall debt as low as possible and that is the most important consideration over the next few years.”

See: Govt says asset sales will cut debt
If  National is planning on extracting $6 to $7 billion from most New Zealanders’ pockets, then they are dreaming. A small minority (the 1%, as usual) might have the resources – but even they, I suspect would have to off-load their own assets to buy into the five offered SOEs.
It is more than likely that, like Contact Energy, the majority of new shareholders will be corporate and/or offshore  investors.  New Zealanders simply don’t have the savings to buy their own energy comnpanies and airline.
If National wants to realise $6 to $7 billion  from partial-privatisation and is serious in not wanting major foreign ownership, then it has only one other option: the NZ Superannuation Fund.
Selling half of five state assets to the NZ Super Fund would achieve several desired goals,

1. Keep state assets in New Zealand ownership
2. Prevent an outflow of profits to offshore investors, which would worsen our current account deficit
3. Satisfy Maori that water resources were not about to be privatised, and therefore any claims before the Waitangi Tribunal could be set aside
4. Fulfill a government-ordered directive that the NZ Super Fund invest more heavily in New Zealand
   

In May 2009, Finance Minister Bill English wrote to the NZ Super Fund, instructing that,

” The Government believes that is is in the national interest for the Fund to have significant interests in New Zealand. Consequently, persuant to section 64 of the New Zealand Superannuation and Retirement Income Act 2004 (the Act), I direct the Guardians to note that it is  the Government’s expectation, in relation to the Fund’s performance, that opportunities  that would enable the Guardians to increase  the allocation of New Zealand assets in the Fund should be appropriately identified and considered by the Guardians. “

See: Letter from Minister of Finance Regarding NZ Directive and Funding May 14 2009
How much does the NZ Super Fund have invested in overseas businesses?
Answer: NZ$6,459,938,145 – Nearly $6.5 billion. Possibly more  by now.
See: NZ Superannuation Fund: Full Final Equity List – 30 June 2011
How much was National expecting to gain from it’s privatisation programme? Between $6 and $7 billion dollars.
$6.5 billion happens to lie smack in-between $6 and $7 billion!
Considering that the NZ Super Fund is actually a state owned entity, selling five SOEs, whether partially or the whole damned lot, would not matter one iota. They would still be state-owned.
National has an opportunity here; they literally can have their SOE Cake, and eat it.

• The state assets would remain state assets.
  

• National would gain a guaranteed NZ$6.5 billion – no mucking around with messy share floats.
  

• The revenue from the state assets would remain in New Zealand.
  

• The Super Fund would have even more profitable investments in their portfolio.
  

• The Super Fund will be investing in our future – not someone elses’, in another country.
  

• Maori may well be satisfied that their taonga, water, was not being privatised.
  

• Our current account would not be blown further into the red.
  

• New Zealanders would be happy chappies, as the great majority oppose losing ownership of state assets.
  

• Opposition from the Left would most likely evaporate – heck, we might even vote for you in 2014, Mr Key!!
  

Where is the down-side in this compromise?! Damned if I can see any.
And the strangest part in all this proposal? I may just  have saved John Key’s arse from being thrown out at the next election.