Recent events in Cyprus have once again brought the global financial sector into sharp public consciousness. This time, as well as a bailout, there was a serious – and ominous - demand from the EU that Cyprus make a “one off” levy (or tax) on the savings of Cypriots and others living in that country.
Acknowledgement: NZ Herald – Hard EU bailout terms anger Cypriot savers
Deposits up to and over €100,000 ($158,000) would be levied with a 9.9% tax whilst below that threshold would be pay a ‘lower’ portion of 6.75%.
Unsurprisingly, the proposed tax resulted in a run on cash withdrawals at ATMS (see: Cypriots asked to surrender up to 10 percent of bank balances in return for EU bailout); banks closed their doors (see: Fury as banks closed to avert run); global sharemarkets were affected (see: Stock Markets Fall Amid Fears Of New Eurozone Crisis); and the British government was forced to fly in one million euros to pay military personnel (see: One Million Euros Heading To Island For British Military Personnel ).
Pressure on the Cypriot government was such that in the last 48 hours, the Savings Tax was dumped (see: Rejection of Deposit Tax Scuttles Deal on Bailout for Cyprus). The Cypriot Parliament voted thirtysix against, with nineteen abstaining. It is noteworthy that not one politician risked his/her life by voting for the proposal.
Europeans. They know how to put pressure on their elected representatives.
Meanwhile, back home, in the Land of the Long White Cloud and several million sheep…
Acknowledgement: Radio NZ – NZ bank bailout scheme is last resort, says PM
Key’s statement here is chilling,
“At the end of the day we’re talking about emergency provisions. These banks are heavily regulated, they have significant oversight and lender of last resort facilities at the Reserve Bank.
This is really in the event that a bank got itself in such a terrible mess that it fell over and had to restart again.”
If that is supposed to be reassuring – it is not. In fact, if anything, this is a clear warning to every single New Zealander that if a bank gets into trouble – or if there is even a hint of trouble – to get in quickly and withdraw every cent that a depositor might have.
If a bank gets in trouble, and has a crippling run on deposits, it will be as a direct consequence to Key’s plan to dip into people’s savings to bail out that institution,
The Reserve Bank’s Open Bank Resolution (OBR) plan, due to come into effect at the end of June, would mean a partial loss on all deposits if a bank failed in New Zealand, in order to fund the bank’s bailout.
Acknowledgement: Fairfax media – Reserve Bank scheme news knocks kiwi
Ironically, this is where Libertarians – who consider all taxation as theft – may have a point.
Taxation is one thing. We pay it so we can enjoy the benefits of a modern society and economy. Roads, bridges, schools, hospitals, police, etc, do not materialise out of thin air.
Dipping into people’s savings accounts – which has already been taxed one way or another – is not a tax. It is expropriation.
Expropriatiion – that dreaded word which National and it’s supporters levy against the Left when we talk about re-nationalising State assets. But which evidently is ok if a bank goes bust and has to be bailed out?
If this principal is to be applied across all sectors of society and the economy, then one could imagine that employees and sub-contractors of Mainzeal should have been taxed to bail out that company. Why should a bank be different to a construction company? Is there a difference?
If this expropriation of deposits was ever to happen, do the depositors gain any benefit? Do they gain shares in the Bank as compensation? Or, if not, does that mean that shareholders gain the benefit of other people’s money being used to prop up their investments?
One could imagine an invalid on a WINZ benefit having his/her meagre savings “taxed” to bail out a bank – to preserve an investor’s shareholding that may be worth millions of dollars. This isn’t justice or common sense, this is nasty, medieval, “robber Baron” stuff.
The biggest irony here is that, according to the principals of the free market, this is a kind of subsidy to a business – a subsidy enforced by the State, against the will of people who are not even shareholders in a particular bank.
Even marxists would balk at such extreme State power to seize people’s money. They’d simply nationalise the bank and be done with it. Depositors would still have their modest savings left intact and untouched.
Key’s proposal is not just crazy from almost every perspective – it is an insult to our intelligence. Especially when banks are doing very well with their profits,
When profits for New Zealand’s four largest banks are at a staggering $3.5 billion (for 2011/12) – an increase of 22% – then that must raise serious questions why Dear Leader is even considering making depositors pay for any potential future bailout.
Shouldn’t the banks be looking at a deposit insurance scheme of some sort? You’d think so, wouldn’t you?
Perhaps, though, an event like this is what might be required to jolt New Zealanders out of their collective complacency. It’s only when the middle classes are hit hard in their wallets, that they stop being passive consumers and start to reassert themselves as active citizens.
Because, my fellow Kiwis, you can bet your last dollar (before the banks seize it) that John Key’s $50 million will be somewhere else – probably safe in some Swiss Bank account.
The people of Cyprus (and Iceland) have shown us the way.
Remember the so-called “Light Bulb” and “Shower Heads” affairs, in 2008, where National slammed the then-Labour Government as engaging in “Nanny State” politics? (see: Showers latest target of Labour’s nanny state ) National’s Nick Smith said,
“People should be free to use as much water as they like when showering, provided they don’t expect others to pay for their profligacy. User-pays is a far better approach than nanny state.”
So using eco lightbulbs and smaller shower flows, to conserve electricity and water is nasty “Nanny Statism”.
But going into people’s savings accounts; stealing their money; and handing it over to banks – is all hunky dory? Well, I’m glad that’s settled.
(Cue theme music to ‘Monty Python’s Flying Circus’.)
This blogpost was first published on The Daily Blog on 22 March 2013.
= fs =
National MP, Mark Mitchell, was a guest on Prime TV’s “Backbenches” on 1 May, along with Damien O’Connor (Labour Party); Jan Logie (Green Party), and Peter Dunne (Peter Dunne Party).
Usual political rah-rah, blah blah, from the Tory politician, until he came up with this throwaway remark,
“We inherited ten years of deficits from the previous Labour Government...”
Now, quite simply, anyone with a passing knowledge of Labour’s fiscal record during their term in office from 2000 to 2008 will know that is a blatantly untrue comment.
In fact, it’s bullshit.
Under Labour, Government Debt to GDP dropped from 31.4% of GDP to 17.4%.
Government debt did indeed rise – under National, as the graph below amply demonstrates;
Acknowledge: Trading Economics/NZ Treasury
National’s government debt is now twice as high as when Labour left office in 2008.
Some will even recall that Labour Finance Minister, Michael Cullen, posted several surpluses during his tenure as Finance Minister – reaching $7.9 billion by 2007;
$2,300,000,000: Dr Cullen’s finest hour (29 May 2002)
Cullen prepares to trumpet high surplus (21 Feb 2003)
Hide attacks Cullen for hiding huge surplus (16 March 2005)
Cullen confirms huge surplus (10 Oct 2007)
Cullen quick to emphasise volatility after surplus hit (19 Feb 2008)
Just as well that Cullen resisted strident calls for massive tax cuts. Instead, perhaps being the wisest man in the decade, realised that common sense demanded that we pay down our sovereign debt, rather than splurge out on an almighty cash-lolly scramble.
Mitchell should know all this. He probably does. In which case we can only wonder if he was perpetuating a right wing lie about Labour’s track record.
If Mitchell isn’t aware of the reality of Labour record whilst in government, then he is woefully ignorant.
And, as pointed out above, is Mitchell aware the govenment debt under National watch has doubled from 17.4% in 2008 (left by Labour) to 37% (generated by National)? Having to borrow billions to pay for two unaffordable tax cuts in 2009 and 2010 certainly did not help (see: Govt borrowing $380m a week ).
Let’s ask Mr Mitchell, shall we?
Date: Fri 3 May 2013, at 12.09pm
From: Frank Macskasy <email@example.com>
Subject: Budget surpluses and deficits
To: Mark Mitchel <firstname.lastname@example.org>
Cc: Dominion Post <email@example.com>, NZ Herald <firstname.lastname@example.org>,
Otago Daily Times <email@example.com>,
Morning Report <firstname.lastname@example.org>,
Nine To Noon RNZ <email@example.com>,
Kim Hill <firstname.lastname@example.org>,
Chris Laidlaw RNZ <email@example.com>
Kia ora Mr Mitchell,
Recently, on 1 May, you made a statement on Prime TV’s “Backbenches” to the effect,
“We inherited ten years of deficits from the previous Labour Government…”
I was surprised that you would make such a comment.
Are you aware that under Labour, Government Debt to GDP dropped from 31.4% of GDP to 17.4%?
Government debt rose thereafter, from 17.4% in 2008 to 37% – generated by your government.
Labour’s surpluses were well publicised in media reports, reaching $7.9 billion by 2007,
$2,300,000,000: Dr Cullen’s finest hour (29 May 2002).
Cullen prepares to trumpet high surplus (21 Feb 2003)..
Hide attacks Cullen for hiding huge surplus (16 March 2005)..
Cullen confirms huge surplus (10 Oct 2007).
Cullen quick to emphasise volatility after surplus hit (19 Feb 2008)
Can you explain how you’ve managed to turn a near-decade of surpluses, and paying down sovereign debt, into “ten years of deficits from the previous Labour Government”?
It is obvious that your statement on Labour’s fiscal track record was somewhat in error.
Will you be issuing a media correction on this issue? If not, why not?
Please note that any statement you provide may be published in a blog.
This blogpost will be updated upon Mr Mitchell’s response.
= fs =
As of today, 1 April 2013, this blogger has laid a complaint with the Commerce Commission regarding National minister’s questionable dealings with Rio Tinto and proposed subsidies for electricity prices,
firstname.lastname@example.org 2:20 PM
- First Name: Frank
- Last Name: Macskasy
- Email: email@example.com
- Business you are complaining about: New Zealand Government
- Street: Molesworth St
- Suburb: Thorndon
- City/Region: Wellington
- Post code: 6160
- Business Contact Number/ Mobile number: (4) 817 9999
Description of complaint
Tony Ryall has recently announced that the NZ Government is intervening directly in negotiations between Meridian Energy and Rio Tinto (which is 80% owner of Tiwai Aluminium Smelter).
Mr Ryall has said,
“With this in mind, the Government has been in contact with Pacific Aluminium’s international parent company Rio Tinto this week to discuss helping to bridge the gap in their positions over the short to medium term, if this could be of assistance in concluding an agreement.
“In the meantime, we understand Meridian’s existing contract with Pacific Aluminium remains in place at least until 1 January 2016 with significant financial and other obligations beyond that.”
Ryall added that “all relevant information – including about the smelter electricity contract – will be reflected in the Mighty River Power offer document which is currently being finalised”.
Source: NZ Herald, Govt steps in to sort out stalled Tiwai power deal ( http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10874174)
I therefore submit the following;
(1) This appears to be a prima facie case of the NZ Government manipulating the future stock price of Mighty River Power (and other state owned powercos), by offering a subsidy to Rio Tinto.
(2) This subsidy is not available to any other company nor individual.
(3) As such, I submit that the NZ Government’s intention to subsidise electricity that is provided to Rio Tinto is done with a view to reduce competition in the market.
Specifically, I draw the Commission’s attention to the Commerce Act 1986; sections 27, 30, and related clauses.
(4) Furthermore, I submit that if any other corporation, company, institution, or individual attempted such an act, that they would be deemed to be guilty of price fixing and manipulation of the market.
I await your response and thank you for your consideration of my complaint.
I will keep readers posted as to what, if anything results from this complaint.
Section 27: Restrictive trade practices
Section 30: Price fixing
= fs =
Acknowledgement: NZ Herald – Perfect chance to can Tiwai
There’s nothing quite like a threat to the New Right economic theory to bring the apologists slip-sliding out of the wood-work.
Case in point: John Roughan’s column in the NZ Herald on 30 March. According to Mr Roughan, the ‘blame’ for this latest fiasco can be sheeted home to John Maynard Keynes and our post-War desire for full employment.
Because, as we (except for neo-liberals) all know, full employment is a good thing for society.
First of all, read Mr Roughan’s article. Then come back to this blogpost, and scroll down…
Ok, read it?
Now who spotted the outrageous piece of delusional rubbish that Mr Roughan wrote in his column?
Let me quote;
“The price of most things at that time was controlled or subsidised and nobody knew or cared that prices didn’t align the item’s cost of production to its value in a competitive market. The economy was a job-creation scheme that ended with double-digit unemployment in the 1970s.”
Either Mr Roughan doesn’t know his history – or he is being wilfully mendacious to promote his rather obvious neo-liberal views.
Let’s have a look at unemployment in the 1970s though to the 1990s,
And to put that graph into actual stats,
Source: NZIER, Statistics NZ.
At no point in the 1970s did unemployment ever rise above 1.7%. Hardly the “double-digit unemployment in the 1970s” that Mr Roughan presented as the unvarnished truth.
In fact, if we look at the actual stats, the only time unemployment rose into double-digit figures was from Jun-91 to Jun-93, when National implemented it’s infamous “Mother of all Budgets”. That Budget, written by arch-neo liberal Ruth Richardson, sent businesses to the wall as well as unemployment skyrocketing,
John Roughan then attempts to use his bogus “facts” to push the typical New Right line,
“Pacific Aluminium asked Meridian to renegotiate a price that was set just before the world economy went sour in 2007 and demand for aluminium dropped. Meridian agreed to a lower price until 2016 but would not commit to a lower price beyond that.
Last week the Government intervened. Some of your taxes and mine are going to be promised to a global mining conglomerate that wants to sell its New Zealand smelter but cannot find a buyer.
The Government could not have better demonstrated the pitfalls of public ownership if it had tried.”
Acknowledgement: NZ Herald – Perfect chance to can Tiwai
“The Government could not have better demonstrated the pitfalls of public ownership if it had tried”, wrote Roughan.
Based on – - – ?
Or just plain bullshit.
The stoush between Rio Tinto and Meridian Energy does not “demonstrate[d] the pitfalls of public ownership” at all.
What it demonstrates is that Rio Tinto has seized the main chance to re-negotiate it’s contract. Does anyone who is not on hallucinogenic drugs not believe even for a moment that Rio Tinto wouldf not try it on with Meridian even if that powerco was 100% privately owned?
Does Mr Roughan honestly believe, with hand-on-heart, that Rio Tinto would behave differently if Meridian was a private company, like Contact Energy?
How f*****g naive can some commentators get, for gods-sakes?
John Roughan’s column is nothing less than neo-liberal propaganda. It is a blatant attempt to twist the current situation, and mis-represent the facts. It is a deflection. It is an acolyte of neo-liberalism trying to white-wash his failed dogma and blame everyone else except his own failed system for this total screw-up.
As if the 2007/08 Global Financial Crisis wasn’t enough to show us that neo-liberal capitalism is a failed ideology. (Who would Mr Roughan blame for that collapse, I wonder? Solo-mums in South Auckland?)
But then, we all know how well Right Wingers take responsibility, don’t we?
Not very well.
NZ Herald: NZ Herald – Perfect chance to can Tiwai (30 March 2013)
The Daily Blog: Chris Trotter, Lying For The Revolution: John Roughan Defends Neoliberalism (1 April 2013)
= fs =
When Solid Energy’s financial crisis became public on 21 February 2013, Bill English, Tony Ryall, and John Key were quick to apportion blame. Their high-paid (by the taxpayer) media strategists had done their dirty work.
- Solid Energy mis-reading trends in coal prices
- The previous Labour government
- The Board and management of Solid Energy
- The Global Financial Crisis
- Mrs Teagle, the tea-lady
Everyone was to blame. National’s hands were clean. The world is a bad place.
So, let’s go through the points above.
1. Solid Energy mis-reading trends in coal prices
One of National’s constant lines - in an attempt to smear Solid Energy’s Board as incompetant – was the SOE’s inability to “read trends in world prices for coal”.
As Dear Leader, John Key said on 25 February,
Asked at his post-cabinet press conference why Solid Energy was in such dire straits, he said its directors grossly over-estimated what they thought coal would be worth.
“They got it completely and utterly wrong, and up to the middle of 2012 they still rejected the international view of where coal was likely to go,” he said.
On 21 February, Little Leader, Bill English said,
“World coal prices have dropped significantly which has contributed to the deteriorating financial position that Solid Energy is in now.
“These discussions are required because the position of the state-owned enterprise has continued to deteriorate despite the restructuring that has already taken place,” Mr English says.
And as Baby Leader, Tony Ryall also said on 21 February,
State-owned Enterprises Minister Tony Ryall said a number of factors had weighed against the company, in particular world coal prices dropping by 40 per cent.
“It is facing very serious financial challenges,” Ryall said.
So the narrative being spread by senior National ministers was that Solid Energy was incompetant and couldn’t understand world coal price trends.
Which, for a company that lives, breathes, and farts coal seemed… unlikely.
#1 – Rebutted
But then, on 13 March, Bill English was reported on Radio New Zealand with this statement,
But Finance Minister Bill English says it wasn’t clear that coal prices were declining, and the Government can’t be held responsible for how much debt Solid Energy eventually took on.
Okay… so despite Key, English, and Ryall insisting that Solid Energy had mis-read trends in global coal prices, he is now saying that “it wasn’t clear that coal prices were declining”?!
Well, I’m glad that’s been cleared up.
After all, it’s not like National was initially claiming that world coal prices [were] dropping by 40 per cent to make Solid Energy’s board look bad – and then suggested it wasn’t clear that coal prices were declining for National to save their own arses.
That would be… contradictory.
2. The previous Labour government
National has blamed the previous Labour government for everything, from the decline of the British Empire, to the sinking of the Titanic. (And trying to pin both World Wars on Labour – but that’s a work-in-progress.)
On 26 February, Key said,
“They can’t wash their hands of the fact that from 2003 on, they were intimately involved with the plans that that company had,” Mr Key said.
On 13 March, English said,
At the time, it was not clear that coal prices were declining. In fact, the best advice from the company—with which the Government ended up disagreeing—was that coal prices would continue to rise. But, as I said, that decision was made in the context of the mess that the previous Labour Government left with the State-owned enterprises.
Ah, the inhumanity of it all… The dastardly tentacles of a previous government, from four years ago, reaches into the present day to thwart National’s good works. It’s amazing that with such power, that Labouir ever managed to lose two elections in succession, from 2008…
One has to wonder though… is National really so powerless? If so, why are they in government?
#2 – Rebutted
In a rather strange moment of open honesty, Tony Ryall had this to say about Labour’s administration of SOEs, on 27 February,
Hon TONY RYALL: No, I am not going to launch some sort of independent investigation into the governance of Solid Energy. The governance of Solid Energy, much of which was appointed under the previous Labour Government, was running that company and it was doing very well up until 2011. We had the scoping study. It identified a number of issues. And I agree with Trevor Mallard: the collapse of world coal prices is a most significant factor in this matter.
And a few days later, on 2 March of this year, Key let slip,
”On the face of it, at least what it had was rising profits. It had a situation where its valuation was going up, it had bankers lending it money, and it had an investment stream that had been set in place by the previous Labour Government,” Mr Key told BusinessDay.
A look at the profits and dividends paid during Labour’s administration bear out their prudent management of SOEs. And confirmed by Tony Ryall and John Key.
In Labour’s entire eight years, not one single SOE suffered a financial collapse of the magnitude of Solid Energy – and Cullen was still posting surpluses, year after year. And paying down government debt. And finding time to play with his grandkids.
The Nats are in office for four years – and they lose a SOE on their watch?
How does that work?
Especially when, as Adam Bennett reported in the Herald on 13 March,
Mr Shearer later said Solid Energy had responded to the Government’s call, “returning $130 million over four years, including $30 million in late 2011 by which time coal prices had further declined and the company was in financial distress“.
He also pointed to the company’s increase in borrowing over that period, rising from $13 million in 2009 to $191 million the following year and $313 million by 2012.
By contrast, the previous Labour government, took only $64.4 million as a dividend to the to the Crown – over an eight year period. (See: Government defends Solid Energy payouts)
Which still baffles me as to why New Zealanders still have this misconception that National are “prudent fiscal managers” of the economy.
Personally, I wouldn’t let the buggers run a sausage sizzle outside Pak’n'Save.
3. The Board and management of Solid Energy
National’s culture of blaming others for their own mistakes is slowly but surely building in the public consciousness. (See previous blogposts: Taking responsibility, National-style, Dear Leader Key blames everyone else for Solid Energy’s financial crisis) It has become de rigueur for National to immediately seek out, and blame others, for one of their cock-ups.
And when one minister – Kate Wilkinson – resigned immediatly upon the release of the report from the Royal Commission on the Pike River Coal Mine Tragedy, it was seen for what it was; tokenism. And a strategic attempt to close down (or minimise) media scrutiny of National’s de-regulation in the 1990s, which led inevitably to a culture of poor safety in our mining industry.
Practically every public comment by National has directly, indirectly, or in a covert fashion, attempted to sheet blame for Solid Energy’s financial crash on it’s Board and CEO, Don Elder.
Key even suggested – po-faced – that the SOE was practically out of control. On 25 February, Dear Leader stated,
While the New Zealand government was unwilling to back Solid Energy in that role, it appears to have been powerless to prevent the company from taking what Key described as “baby steps” towards such a future.
“The company did have the right to draw down debt and make investments without shareholder authority” up to a certain level, Mr Key says.
So, can someone remind me again – what, precisely, is the role of the Minister for State Owned Enterprises?
#3 – Rebutted
The above was nothing less than an attempt at total abdication of responsibility by Key and his Ministers. As an incredibly insightful Dominion Post editorial of 2 March stated,
There are always excuses when a company starts to fail. John Key’s explanation for the trouble at Solid Energy, however – he blamed the Labour government – was pitiful.
It was Trevor Mallard’s fault, apparently, for encouraging SOEs to spread their wings and fly. That was in 2007 or 2008.
This won’t do, and not just because Mr Key’s Government has been in power for more than four years. His argument also contradicts itself. A Labour government was seemingly omnipotent and could have its way with the state-owned coal company. But National had no such power.
The Government certainly said no when Solid Energy asked for a billion dollars to turn itself into a super-company along the lines of Petrobras, the Brazilian giant. Mr Key says it had grave doubts about the company’s expansion plans. His political opponents point out that he and Bill English had publicly backed Solid Energy’s big plans for lignite conversion and briquetting.
So what was really going on? Mr Key says the company didn’t require the Government’s approval for the investments. Nor did the Government have a good reason to sack the board, as it could have done under the SOE legislation. So: nothing to see here, apparently.
If all these excuses were valid, it would be hard to know how any government could be held to account for what its state-owned companies were doing. Mr Key’s Government cannot get off so lightly. Nor can his officials. It is unclear just what kind of “monitoring” Treasury was doing, but it obviously wasn’t effective.
And then, on 13 March – the bombshell,
So now we’re getting at the answers.
Now we’re starting to build up a clearer picture as to not how Solid Energy got into debt – but why.
As with most things, the anwer is simple.
National needed cash to balance it’s books by 2014/15. Not content to flog off state assets to raise x-billion dollars, it used Solid Energy as as cash cow, to extract maximum dividends.
Just as Brierleys extracted maximum dividends from Air New Zealand in 2001, stripping the airline of it’s cash reserves in the process and bankrupting it. (see previous blogpost: A Clear Warning to Investors in SOEs)
More importantly, it used Solid Energy as a front to borrow.
If a government borrows cash, it shows up on their balance books as a liability.
If a SOE borrows cash; then pays it to a government as a “dividend”, it shows up on the books as a profit.
That was why National was forcing Solid Energy to borrow hundreds of millions of dollars and then demanding it to be paid into government coffers as a “dividend”.
My immediate thoughts on this are,
- All three ministers – Key, English, and Ryall – should appear before the Commerce Select Committee to answer questions. To this blogger, there appears to be serious implications of questionable behaviour by National Ministers and their dealings with Solid Energy.
- There is more to come out on this isssue, such as why Solid Energy’s Board allowed this cash-stripping by National Ministers to be carried out.
- And this is the most important: I think every New Zealander who is considering investing in Mighty River Power – and other SOE shares – should look very carefully at their books. The question has to be asked; have National Ministers done the same thing to other SOES? Are they also heavily “geared” (borrowed against assets) and highly vulnerable to market downturns?
- The auditor-general, or some other forensic accounting firm, should immediatly be called in to to assess the books of all SOES.
At this point in time, I wouldn’t touch a single share of any SOE, with bio-hazard gloves.
They may be financially toxic.
Fairfax media: Debt-laden Solid Energy talking to banks (21 Feb 2013)
Building a Brighter Future: Bill English & Tony Ryall – Statement on Solid Energy (21 Feb 2013)
Scoop: Govt blocked grandiose Solid Energy plans in 2009 (25 February 2013)
MSN News: Solid Energy got coal price wrong: Key (25 February 2013)
TV3: Govt, Labour squabble over Solid Energy (26 Feb 2013)
Otago Daily Times: Solid Energy bail-out cost likely to rise (2 March 2013)
Dominion Post: Editorial: Solid Energy excuses fuel anger (2 March 2013)
Southland Times: Government defends Solid Energy payouts (12 March 2013)
Radio NZ: Labour says Govt forced Solid Energy to borrow more (13 March 2013)
NZ Herald: Govt accused of milking Solid Energy for dividends (13 March 2013)
Parliament: Questions for oral answer: Ministers—Confidence (13 March 2013)
Parliament: Parliament Questions and Answers (13 March 2013)
= fs =
The recent financial crisis and near-collapse of Solid Energy – one of the five, state owned enterprises planned for partial-privatisation – should serve as a warning for those investor-vultures circling to buy shares in any of the SOEs.
In fact, recent history regarding Air New Zealand, Kiwiwail, and (non-privatised) BNZ in 1991, are indicators that privatisation of state assets is not a guaranteed roadmap to wealth,
It is noteworthy that one of the cause of Air New Zealand’s collapse was it’s foolhardy buy-out of Australian airline, Ansett,
First, the decision by Air New Zealand to pay dividends and second, the decision to buy the second half of Ansett. Both moves turned out to be considerably more beneficial to the interests of Brierleys than those of Air New Zealand.
Take the Ansett purchase. In early 1999, Cushing announced that Air New Zealand was vetoing Singapore Airline’s bid to buy News Corp’s 50% of Ansett Holdings (Air New Zealand had held the other 50% of Ansett since September 1996). Instead, it decided to pay News Corp $A580 million and get 100% control.
It’s most likely true that Air New Zealand paid too much for the stake and that directors had too little information about Ansett’s financial and engineering state. These are well-aired opinions, but are secondary to the main question that should be asked: Why did Air New Zealand buy the second half of Ansett at all? It’s not just that it was hopelessly out of its depth buying an airline twice its size. It’s just hard to see any benefits – to Air New Zealand, that is.
On top of that were big dividend demands from one of Air Zealand’s major shareholders, Brierley’s,
The at times cash-strapped investment company held between 30% and 47% of shares over the period so, based on the total dividend of $765 million, Brierley reaped an estimated $250 million to $380 million from the airline. And Air New Zealand’s decision to buy the second half of Ansett, cutting Singapore Airlines out of the deal, contributed to Brierleys being able to do its own deal with Singapore.
In April last year, two months after Air New Zealand bought Ansett, Brierleys sold Singapore Airlines all its Air New Zealand “B” shares for $285 million, or $3 a share. It was arguably the last exit option for Brierleys from these shares, and, apart from a spike at the end of last year, Air New Zealand shares have largely tracked downwards ever since – they were trading around 30 cents as Unlimited went to press.
In other words, Air New Zealand had over-extended in unwise investments (as has Solid Energy), and was bled dry by rapacious demands for dividends (as did Faye Richwhite in NZ Rail in the early 1990s).
How does this relate to the upcoming partial-sale of Mighty River Power?
Recent revelations that Mighty River Power has shaky investments on Chile, should cause potential investors to pause for thought,
According to the TV3 story above, “Mighty River Power has spent $250 million at the geothermal plant in southern Chile, but has just written off $89 million as the investments struggle“.
To which Key responded casually,
“There is always risk.”
Dear Leader seems somewhat blase about investors’ risks? Of course he is. It’s not his money.
The Crown Ownership Monitoring Unit (COMU) reported,
During the period, the Company recognised $91.4 million of impairments principally reflecting its investment in the GeoGlobal Partners I Fund (GGE Fund), and its greenfield explorations for potential developments in Chile and Germany.
This impairment followed higher than expected costs at the Tolhuaca project in Chile due to the worst winter in 40 years adversely affecting drilling performance and only one of the two wells having proven production capacity. The value of GGE’s investment at Weiheim in Germany, has been impacted by increased costs due to required changes in the drilling location following the 3D seismic surveys and delays from environmental court challenges which have been resolved post balance date.
The GGE Fund had not raised capital from other investors by the end of the 2012 and Mighty River Power made the decision not to invest further capital into the existing structure. Overall, the impairment charge of $88.9 million for the German and Tolhuaca assets and the management company of GGE LLC leaves a residual book value of $91.8 million.
On top of Mighty River Power’s dodgy investment in Chile, New Zealand is now experiencing what is being called the worst drought in seven decades (see: North Island’s worst drought in 70 years). As Climate scientist Jim Salinger said about New Zealand’s current weather patterns continuing, and becoming similar to the Mediterranean,
“What it means is that if it just doesn’t rain for at least four months of the year, it means you have to bring in your water from elsewhere.”
As all investors should bear in mind; most of our power generation is generated from hydro stations. Mighty River Power, especially, derives most of its electricity from eight hydro-electric stations on the Waikato River.
Mighty River Power CEO, Doug Heffernan has given a clear warning,
“Following the lower than average inflows into the Waikato catchment during the last quarter [to December 31], Mighty River ended the half year at just 69 per cent of historical average [hydro storage].”
And Equity analyst Phillip Anderson of Devon Funds stated,
“The same period last year they got really strong inflows, and this is the exact opposite . . .
In the second half of this reporting year they’re going to have to buy a lot more electricity to feed their customers, either on the spot market at a lot higher cost or use their [Southdown] gas plant.
We expect the second half of this year is going to be a lot tougher for them, they should get their margins squeezed if that all plays out.”
The equation is blindingly simple,
Less rain = less water = less electricity generation
The question that begs to be asked is; where does the risk of investing in SOEs fall – private investors, or the State?
The answer I submit to the reader is, that like Air New Zealand, it will be private investors who bear the brunt of all risk. The State will simply pick up the pieces, buying up shares at bargain basement prices, should anything go wrong.
Electricity generators like Mighty River Power will simply never be allowed to fail. Had the Labour government in 2001 allowed Air New Zealand to collapse, the fall-out to the rest of the reconomy would have been too horrendous to contemplate, and flow-on effects to other businesses (eg; exporters and tourism) and the economy would have been worse than any bail-out.
But any bailout will involve a massive loss for investors, as their share-value plummets. Again, Air New Zealand was an example to us all.
As the impact of climate change creates more uncertainly for our state power companies, investors need to think carefully before committing one single dollar toward buying shares,
“Do I really want to bear all the risk?”
Those who lost out on their investments in Air New Zealand in the 1990s will probably answer,
The Air New Zealand crash (1 November 2001)
A history of bailouts (7 April 2011)
Foreigners important for SOE sell-downs: Treasury (30 June 2011)
No law stopping foreign investors (16 Dec 2011)
Parched Waikato could hit Mighty River Power (22 Feb 2013)
Mighty River Power shares float mid-May (4 March 2013)
Taking the plunge in Mighty River (9 March 2013)
Key struggles to push Chilean investments (9 March 2013)
North Island’s worst drought in 70 years (10 March 2013)
Seemorerocks: An Appeal for a New Zealand Risk Assessment
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That was then…
Solid Energy starts work at Mataura Briquette Plant
Friday, 9 September 2011, 2:57 pm
Press Release: Solid Energy NZ
9 September 2011
Solid Energy marks the start of work at its Mataura Briquette Plant
The Hon Bill English, MP for Clutha-Southland and Minister of Finance, today marked the official start of work at Solid Energy’s Mataura Briquette Plant, by “turning the first sod” at a small event on site with neighbours, local authorities, and other guests.
The $25 million Mataura briquette plant is planned to start production by June 2012. It will produce up to 90,000 tonnes a year of low-moisture and higher-energy briquettes from about 150,000 tonnes of lignite mined from Solid Energy’s New Vale Opencast Mine and trucked to the Craig Road site. The plant will use technology developed in the USA by GTL Energy.
This is now…
A year and a half later, neither Dear Leader Key nor Little Leader Bill English seemed terribly keen to be associated with any more photo-ops with Don Elder.
In fact, the much vaunted sod-turning in September 2011, to build a brand-new $25 million briquette plant at Mataura, was no longer quite so glamous. Despite probably still having Southland dirt on his shoes, both Bill English and John Key were at pains to distance themselves from Solid Energy’s highly publicised energy projects,
“Four or five years ago they set out on a big programme of expenditure on alternative energy, including researching into lignite down south to coal gasification and other research-based speculation, and that hasn’t turned out the way they thought.” – Bill English, 22 Feb 2013
“The second thing is that they made a number of investments which have proved not to be very valuable and the Government has been working on that process for the last couple of years.” - John Key, 23 Feb 2013
It’s amazing how politicians seem to have this ability – verging on a preternatural super power – to distance themselves from something they had only recently embraced and supported with whole-hearted gusto.
Interesting to note that as well as the $23.5 million in bonuses paid over the past two years to 950 employees, Solid Energy also paid out considerable dividends to the government;
30 June 2009 – $59.9 million (source)
30 June 2010 – $54 million (source)
30 June 2011 – $20 million (source)
30 June 2012 (paid at 30 Sept 2011) – $30 million (source)
Total: $163.9 million
Plus millions more paid in company tax.
With the data above, I have some questions;
- It seems remarkable that National only discovered a couple of days ago that Solid Energy’s financial position was not sound. What was Bill English doing last year?
- How could Solid Energy’s financial position go from a pre-tax profit of $127.5 million (see: Solid Energy shines despite earthquakes) in August 2011 – to a massive $389 million debt this year? Did National gouge one of our cash-state-cows?
- With Solid Energy’s expansion projects (which Bill English must’ve known about, as he turned a sod of earth in Southland on 9 September 2011), were the dividends paid since 2009 realistic?
- With National’s track record of constantly shifting responsibility away from themselves, who are pointing the finger at? With all the highly paid Ministers, board members, and executives – will the office cleaner be held to account?
- Is the corporate model, with big salaries and bonuses paid to executives and an evident lack of transparency, appropriate for state owned enterprises?
- Will workers be made to suffer job lossses and subsequent economic hardship, because of the actions of Solid Energy’s executives and Crown Ministers? Why aren’t the workers offered the same ‘golden parachute’ that ex-CEO Don Elder most likely received?
No doubt neo-liberals will point to the failure of ‘Solid Energy’ as proof-positive that governments cannot run state-owned businesses.
This is proof positive that National (or other right wing) governments cannot run state-owned businesses.
Tim Jones, Coal Action Network Aotearoa
Previous Blog Post
Robert Guyton: Comments on Solid Energy
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At a time when this country’s construction companies should be laughing all the way to the bank, re-building Christchurch…
At a time when we need 100,000 new houses for our young folk…
At a time when we have 175,000 unemployed (and rising) people, desperate for jobs…
At a time when we have a serious shortage of skilled tradespeople…
This is what we get instead,
Seriously now. If any National Party voters are reading this – is this what you had in mind when you voted for Key and his “Brighter Future” rhetoric and empty promises?
Because, really, this is what a hands-off, neo-liberal government does. It does nothing. Instead, like some kind of cargo-cult, it places it’s faith in the “Market”. And the result is an economy stagnating and people losing their jobs.
These people are your fellow New Zealanders. Do National supporters feel ok about this?
I’m hoping not. I’m hoping that a number of National voters are starting to come to the realisation that things are terribly wrong, and John Key and his mates haven’t a clue.
But in case some National voters think this is acceptable and are comfortable with companies falling over and unemployment sky-rocketing – then a pox on your heads. May your children be the next to depart this country and never return.
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By now, it has become fairly well known that National’s tax cuts in 2009 and 2010 were unaffordable and impacted disastrously on government revenue (and subsequent spending) in following years.
In 2008, National tempted voters with promises of “self funding” tax-cuts. (Though “self funding” was never very clearly explained.)
National’s rebalancing of the tax system is self-funding and requires no cuts to public services or additional borrowing.
This makes it absolutely clear that to fund National’s tax package there is no requirement for additional borrowing and there is no requirement to cut public services.
Source: Economy – Tax Policy 2008
The pledge of “no requirement to cut public services ” was also one that was made (and subsequently broken in dramatic fashion).
In May 2008, Key was making bold statements of “meaningful“ tax cuts, “north of $50“,
John Key… said National would be looking at economic figures and what other promises Dr Cullen made in the budget on Thursday… But he was “very confident” National could deliver an ongoing programme of tax cuts, like that promised in 2005”.
Despite the growing black clouds of a global downturn, Key was still optimistic. When questioned by Sue Eden of the NZ Herald whether National’s tax cuts programme of 2005 were still credible given uncertain economic circumstances, Dear Leader replied,
“Well, I think it is.”
National will fast track a second round of tax cuts and is likely to increase borrowing to pay for some of its spending promises, the party’s leader John Key says.
But Mr Key said the borrowing would be for new infrastructure projects rather than National’s quicker and larger tax cuts which would be “hermetically sealed” from the debt programme.
The admission on borrowing comes as National faces growing calls to explain how it will pay for its promises, which include the larger faster tax cuts, a $1.5 billion broadband plan and a new prison in its first term.
It has also promised to keep many of Labour’s big spending policies including Working for Families and interest free student loans.
Mr Key today said there would be “modest changes” to KiwiSaver.
How does one ” “hermetically seal” tax cuts from the debt programme ” ?!
The ‘crunch’ came on 6 October 2008, when Treasury released a document known as the “PREFU” (Pre-Election Economic and Fiscal Update). This Treasury report analyses and discloses the fiscal and economic state of the nation, with short and medium-term outlooks, based on international and local trends.
The 2008 PREFU started with this dire warning,
The economic and fiscal outlook has deteriorated since the Budget Update
In the five months since the Budget Update was finalised, we have witnessed a number of significant domestic and international developments: in particular, the deepening of the international financial crisis, the slowing housing market, and growing pressure on households and businesses. These developments are key factors in our updated view of the economy and the government’s finances set out in this Pre-election Update.
We are now expecting weaker economic growth over the next few years, resulting in slower growth in tax revenue and higher government expenditure. Combined with increases in the costs of some existing policies, these factors lead to sustained operating balance deficits and higher debt-to-GDP ratios.
The economic outlook is weaker …
Imbalances have built up during nearly a decade of sustained growth, including inflation pressures, an overvalued housing market, high household debt and a large current account deficit, with implications for interest rates and the exchange rate. With the economy slowing, these imbalances are starting to unwind – as are imbalances in the global economy – but there is a long way to go.
The opening statement went on to state with unequivocal frankness,
The international financial crisis has deepened and is having an adverse impact on global economic growth. New Zealand is expected to feel the effects of the financial crisis principally through the tighter availability and increased costs of credit, but also through a fall in business and consumer confidence, falling asset values and lower demand and prices for our exports.
The weaker economic growth that we are forecasting is reflected in reductions in our tax revenue forecasts. Compared with the Budget Update, we expect tax revenue to be on average around $900 million lower for each of the next three years.
- The weak outlook for the household sector will have a direct impact through GST, which is forecast to grow by around 4% per annum over the next five years, compared with 7.5% over the six years to 2007.
- With firms’ margins under pressure and profitability low, underlying corporate income tax is forecast to decline by 3% in the 2009 June year, and growth is expected to be negligible in 2010 as accumulated tax losses offset profits.
- A relatively robust forecast for wages over the next few years helps to keep underlying growth in PAYE up at around 5% per annum.
The largest single change in government spending in the Pre-election Update is an increase in the expected costs of benefits. Compared with the Budget Update, benefit expenses are around $500 million per annum higher, reflecting both an increase in numbers of beneficiaries as a result of the slowing economy, and the impact of higher inflation on the costs of indexing benefits.
As a result of the various factors set out above, the government’s debt outlook deteriorates. This leads to higher debt servicing costs, which are forecast to be around $500 million per annum higher
Treasury continued – in considerable detail – to outline the gloomy prospects for New Zealand’s fiscal and economic short-term and medium-term outlooks (see: Fiscal Outlook),
In Risks and Scenarios, Treasury wrote,
Since the Budget Update, global developments have been more in line with the alternative scenario than the Budget forecast and global financial and economic conditions have worsened significantly. On the domestic front, finance companies have continued to face reduced debenture funding and more finance companies went into receivership or moratorium in the past three months. The speed and magnitude of the slowing in domestic demand has been more abrupt and greater than forecast in the Budget Update.
Reflecting these recent international and domestic developments, we have made significant downward revisions to our growth forecasts in this Update. However, the financial turmoil has intensified since the finalisation of our economic forecasts. As a result, we have seen the downside risks to our growth forecasts increase markedly, particularly in the years to March 2010 and 2011.
Unlike his “lack of knowledge” over the GCSB monitoring of Kim Dotcom, or the Police report on John Banks, John Key cannot feign ignorance over the 2008 PREFU report,
“John Key has defended his party’s planned program of tax cuts, after Treasury numbers released today showed the economic outlook has deteriorated badly since the May budget. The numbers have seen Treasury reducing its revenue forecasts and increasing its predictions of costs such as benefits. Cash deficits – the bottom line after all infrastructure funding and payments to the New Zealand Superannuation Fund are made – is predicted to blow out from around $3 billion a year to around $6 billion a year.”
Especially when Bill English admitted his knowledge of the PREFU,
“The figures outlined in the Prefu are a bit worse than we expected, and we are currently digesting them. However, National is not content to run a decade of deficits.”
In an example of black-humoured irony, English went on to say,
“New Zealand can no longer afford Michael Cullen and Labour’s big-spending low-growth policies.”
But evidently New Zealand could afford National’s “ big-tax-cutting low-growth policies“?
On 6 October 2008, Key reacted to the PREFU (proving he had full knowledge of it’s contents, and made this astounding comment when questioned about National’s planned tax cuts, at 0:40,
“REPORTER: What is your growth programme, does it include tax cuts?.”
“JOHN KEY: It certainly does include tax cuts. We have a programme of tax cuts.”
Key’s comments following 0:40 seem equally bizarre, and at 2:28 admits that “… we can’t deliver anything other than, ‘yknow, a legacy of deficits for New Zealand…” – and still continues to warble on about cutting taxes, including trying to justify “debt for future growth“.
The consequences were a $2 billion hole in government tax revenue (see: Outlook slashes tax-take by $8b; Govt’s 2010 tax cuts ‘costing $2 billion and counting’); budget deficits (see: Budget deficit $1.3b worse); increased borrowings (see: Govt borrowing $380m a week); cuts to the State sector in terms of services and jobs (see: Early childhood education subsidies cut; 10 August: Unhealthy Health Cuts, 2500 jobs cut, but only $20m saved); and surreptitious increases in government charges and taxation elsewhere (see: Petrol price rises to balance books; Student loan repayments hiked, allowances restricted; Prescription charges on the rise); and asset sales (see: Govt says asset sales will cut debt).
The point of this blogpost is simple.
It’s not to look back, at the past…
… it is to look forward to the future.
When National makes Big Promises, be wary of the nature of said promises, and the underlying , invisible “hooks” contained within them.
Quite simply when the Nats offer you a “tax cut”, the first question that should pop into your head is not, “Oh goody, I wonder how much I’ll get!”
The first thought should instead be, “Uh oh, I wonder how much that’s going to cost me!”.
Because as sure as evolution made little green apples and the sun will rise tomorrow, the Nats care very little about your pay packet.
They care only about “rewarding hard work” [translation: more income for the rich] and “making the veconomy more competitive” [translation: implementing their neo-liberal agenda for their ideological crusade to turn this country into a Market-driven economy, away from an egalitarian society].
In the process, if they have to turn our country into a slow-rolling, economic train-wreck, then so be it.
They can always blame someone else,
Key even blames Labour for the global recession !? (see @ 0:48)
In the meantime, did National recklessly damage the New Zealand economy with unaffordable tax cuts, despite Key & Co being given ample warning by Treasury – simply to get elected in 2008?
Draw your own conclusions.
The evidence speaks for itself.
The Atlantic: Tax Cuts Don’t Lead to Economic Growth, a New 65-Year Study Finds (16 Sept 2012)
National Party: Economy – Tax Policy 2008
NZ Herald: National’s 2005 tax cut plans still credible – Key (20 May 2008)
NZ Herald: Nats to borrow for other spending – but not tax cuts (2 Aug 2008)
The Treasury: Pre-election Economic and Fiscal Update 2008 (6 Oct 2008)
NZ Herald: $30b deficit won’t stop Nats tax cuts (6 Oct 2008)
BBC News: Bank shares fall despite bail-out (13 Oct 2008)
Bay of Plenty Times: John Key: We cannot afford KiwiSaver (11 May 2011)
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