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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Something I blogged on 25 June 2012, and now more appropriate than ever…
On last weekends’ (23/24 June 2012) “The Nation“, the issue of asset sales was discussed with NZ First leader, Winston Peters; Green Party MP, Gareth Hughes; and Labour MP, Clayton Cosgrove,
Whilst all three parties are staunchly opposed to state asset sales, NZ First leader, Winston Peters went one step further, promising that his Party would buy back the assets.
Gareth Hughes and Clayton Cosgrove were luke-warm on the idea, quite rightly stating that there were simply too many variables involved in committing to a buy-back two and a half years out from the next election. (And Peters never followed through on his election pledge in 1996 to buy back NZ Forestry – “to hand back the envelope”, as he put it - after National had privatised it.) There was simply no way of knowing what state National would leave the economy.
Considering National’s tragically incompetant economic mismanagement thus far, the outlook for New Zealand is not good. We can look forward to more of the usual,
- More migration to Australia
- More low growth
- More high unemployment
- More deficits
- More skewed taxation/investment policies
- Still more deficits
- More cuts to state services
- And did I mention more deficits?
By 2014, National will have frittered away most (if not all) of the proceeds from the sale of Meridian, Genesis, Mighty River Power, Solid Energy, and Air New Zealand.
In such an environment, it is difficult to sound plausible when promising to buy back multi-billion dollar corporations.
Not to be thwarted, Peters replied to a question by Rachel Smalley, stating adamantly,
” The market needs to know that Winston Peters and a future government is going to take back those assets. By that I mean pay no greater price than their first offering price. This is, if they transfer to seven or eight people, it doesn’t matter, we’ll pay the first price or less. “
It remains to be seen if Peters will carry out that threat – especially if a number of his shareholders are retired Kiwi superannuitants?
When further questioned by Rachel Smalley, Peters offered specific ideas how a buy-back might be funded,
” Why can’t we borrow from the super fund, for example? And pay that back over time? And why can’t we borrow from Kiwisaver for example, and pay that back over time…”
The answer is that governments are sovereign and can make whatever laws they deem fit. That includes buying back assets at market value; at original sale price; or simple expropriation without compensation. (The latter would probably be unacceptable to 99% of New Zealanders and would play havoc with our economy.)
Peters is correct; funding per se is not an issue. In fact, money could be borrowed from any number of sources, including overseas lenders. The gains from all five SOEs – especially the power companies – would outweigh the cost of any borrowings.
- Cost of borrowing from overseas: 2% interest
- Returns from SOEs: 17%
- Profit to NZ: 15%
We make on the deal.
The question is, can an incoming Labour-Green-NZ First-Mana government accomplish such a plan?
Should such a radical policy be presented to the public at an election, the National Party would go into Warp Drive with a mass panic-attack.
But it’s not National that would be panicked.
It would be National going hard-out to panic the public.
National’s scare-campaign would promise the voters economic collapse; investors deserting the country; a crashed share-market; cows drying up; a plague of locusts; the Waikato River turning to blood; hordes of zombie-dead rising up…
And as we all know, most low-information voters are highly susceptible to such fear-campaigns. The result would be predictable:
But let’s try that again…
A more plausible scenario would have the leadership of Labour, NZ First, the Greens, and Mana, meeting at a secluded retreat for a high-level, cross-party strategy conference.
At the conclusion of said conference, the Leaders emerge, with an “understanding”, of recognising each others’ differing policies,
- Winston Peters presents a plan to the public, promoting NZF policy to buy-back the five SOEs. As per his original proposals, all shares will be repurchased at original offer-price.
- The Mana Party buy-in to NZ First’s plan and pledge their support.
- Labour and the Greens release the joint-Party declaration stating that whilst they do not pledge support to NZ First/Mana’s proposal – neither do they discount it. At this point, say Labour and the Greens, all options are on the table.
That scenario creates considerable uncertainty and anxiety in the minds of potential share-purchasers. Whilst they know that they will be recompensed in any buy-back scheme – they are effectively stymied in on-selling the shares for gain. Because no new investor in their right mind would want to buy shares that (a) probably no one else will want to buy and (b) once the buy-back begins, they would lose out.
Eg; Peter buys 1,000 shares at original offer price of $2 per share. Cost to Peter: $2,000.
Peter then on-sells shares to Paul at $2.50 per share. Cost to Paul: $2,500. Profit to Peter: $500.
Paul then cannot on-sell his shares – no one else is buying. Once elected, a new centre-left government implements a buy back of shares at original offer-price @ $2 per share. Price paid to Paul: $2,000. Loss to Paul: $500.
Such a strategy is high-stakes politics at it’s riskiest. Even if Labour and the Greens do not commit to a specific buy-back plan, and “left their options open” - would the public wear it?
The certainty in any such grand strategy is that the asset sale would be effectively sabotaged. No individual or corporate buyer would want to become involved in this kind of uncertainty.
Of less certainty is how the public would perceive a situation (even if Labour and the Greens remained staunchly adamant that they were not committed to any buy-back plan) of political Parties engaging in such a deliberate scheme of de-stabilisation of a current government’s policies.
The asset sales programme would most likely fail, for sure.
But at what cost? Labour and the centre-left losing the next election?
We may well end up winning the war to save our SOEs – but end up a casualty of the battle.
Related Blog posts
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Continued from: Asset Sales: two down, three to go!
As predicted, the Waitangi Tribunal has issued a report endorsing a delay to asset sales until the issue of water rights can be resolved,
Specifically, the report recommends,
- Maori have long established property rights over water bodies
- Ownership precedents date back to 1929 when Nga Puhi was granted ownership of Lake Omapere
- Maori culture and rights should not be relegated and ignored.
- The claim is not opportunistic
- Offering shares in the companies to Maori is not a remedy
- Shares in conjunction with enhanced power on the boards of these companies could provide meaningful recognition
- It is impossible for the Tribunal to recognise all Maori water rights across the whole country
- It is possible to devise an appropriate scheme for Maori affected by the sale of the assets but more time is needed
If, as Dear Leader John Key stated on 10 July, that National could decide to ignore the Tribunal’s findings (because they are non-binding), then the matter will head to the High Court.
Either way, the asset sale process has been stalled.
The Tribunal’s decision is yet another nail in the coffin of this wretched privatisation agenda.
As pointed out in a previous blogpiece ( Asset Sales: two down, three to go! ), the process has been hampered by corporate interests; low shares prices (Air New Zealand); poor international commodity prices (Solid Energy’s coal); and lower than anticipated revenue from certain electricity companies.
This blogger sez; thank god for the Treaty of Waitangi. We may yet save our state assets from being stolen from us, the people.
Who would have thought that the Treaty – designed in 1840 to protect Maori assets from ruthless activity by colonials – would 172 years later protect the assets owned by ALL New Zealanders.
National and it’s redneck supporters may object with shrill hysteria.
These assets belong to all of us. Not just those with the money to buy them.
And it’s a bit rich for National politicians and their sycophantic supporters and fellow travellers to now be insisting that “no one owns the water”.
Especially since the concept of private ownership for land, trees, fishing quota, airwaves, etc, etc, etc, was inytroduced by Pakeha to New Zealand.
Now the architects of the capitalist notion of private ownership are screaming for collective ownership over water?
Get real, you rednecks.
Vocal right wingers and anonymous commentators on various internet fora are simply livid that Maori are exercising the same rights that Pakeha themselves have used for their own benefit and wealth-accumulation for the last two hundred years.
National may well begin to comprehend that it is on a hiding to nowhere on this issue. It is time for John Key to comprehend,
- The majority of New Zealanders do not want state assets privatised
- Maori have a legitimate intrerest in water rights if states assets are privatised
- Privatisation is opening a can of worms with corporate vultures circling overhead, looking for cheaper power deals
- The State will not earn anything near the $5 to $7 billion that Bill Enlish has been anticipating
John Key, it is time to knock asset sales on the head.
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Oh dear, National seems to be in a spot of bother over it’s planned partial privatisation of five SOEs…
One state owned enterprise, Solid Energy, appears now to be off the sales list. According to Finance Minister Bill English,
On top of that, there appears to be a real questionmark over the sale-value of Air New Zealand, as well, according to outgoing chief executive Rob Fyfe,
“However, outgoing chief executive Rob Fyfe has said he would be “surprised if the Government would be wanting to sell” at the current low share price.
The company was in the midst of a “cyclical low” on its share price, Fyfe said in June.”
Fyfe is correct.
A look at Air New Zealand’s recent and longer term share price history shows that it has been badly affected by the Global Financial Crisis (GFC).
In 2007, Air New Zealand’s share price stood at $2.47 a share,
At the end of trading (22 Aug), today, that share price stood at 92.5 cents each. That’s a loss of $1.545 per share,
In fact, the share price dropped from 94.5 cents a share yesterday (21 Aug) to it’s current level of 92 cents.
Looked at another way; it’s like having your home valued at $247,000 in 2007, prior to the onset of the GFC – and having it valued at only $92,500 today.
Not a good environment to be a seller.
NOTE: It is interesting that, of all the SOEs, Air New Zealand is the only one that has a small, privately-owned component. The state owns 73.13% of Air New Zealand, other investors own 26.87%.
This situation is a ‘quirk’ of Air New Zealand’s re-nationalisation in October 2001, when it faced collapse under a massive $NZ1.425 billion operating loss incurred by then-private owners.
So it’s current share value is a relatively true reflection of it’s present market-value. There is no “guesswork” involved, as Bill English revealed in February this year, with the other four SOEs,
Helluva way to run an economy…
Most sane people wouldn’t sell at such a ridiculously low price and would wait for the market to recover.
However, despite misguided belief, National’s commercial nous is vastly over-rated. In fact, some of their commercial decisions have been absolutely apalling.
The most famous being that these assets – especially the power companies – actually return a higher dividend to government than would be the cost of borrowing that same money. As BERL reported in May,
” Partial asset sales will do nothing to curb New Zealand’s growing debt problem, a new report by economic analysts Berl says.
The Berl report, commissioned by the Green Party and released today, says the Government’s partial asset sales programme to build new assets would leave the Crown accounts ”permanently worse off”.
Government debt, the ratio of debt to assets, net worth and total assets would all be worse off after the programme was carried out, Berl found.
”The interim loss of earnings resulting from reduced dividends and the period of time before the new assets reap benefits is never recouped,” the report said.
”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“.”
The up-shot? Unless the global economy stages a miraculous recovery in the next two years (about as likely as The Second Coming or Klingons camping out in my backyard), and National ministers are dumber than I thought, Solid Energy and Air New Zealand can be scratched from the privatisation agenda.
Added to this, is a brewing toxic mess involving commercial interests and Treaty claims over water rights…
At the beginning of August, Key realised that the partial-sale of SOEs was not going to go smoothly. Until now, state owned power companies were exploiting water resources for the benefit of the nation as a whole.
Maori were content with that status quo; for as long as no one owned the power companies – they were owned by us all – the same could be said of water.
But the moment that private ownership of hydro-power generation was mooted – the situation changed. Water would be used to generate power, which would be sold, and would deliver profits to private owners.
Saying that “no one owns the water” that hydro-power stations use is akin to saying no one owns the coal or gas that are used in coal-powered and gas-powered stations. Ridiculous.
The Waitangi Tribunal will shortly be delivering it’s response to Maori Council claims over water rights.
Most likely, the Tribunal will find in favour of Maori. This blogger can conceive of no reason why this should not happen, and just as land can be owned – so can water rights.
It’s a bit late-in-the-day for capitalist National voters and politicians to now be claiming socialist principles of “collective ownership”. That just ain’t gonna wash, Jethro.
If National over-rules the Tribunal findings, then Maori will go to Court – the High Court to be precise. Of all Pakeha institutions, Maori have a great affinity for the legal system. They know how to use it for greatest advantage.
Going to Court will have one result; a lengthy delay in the asset sales programme.
On 22 August, National admitted what the rest of us already knew,
” The Government says it is going to have to start making judgments about how much of its partial asset sales programme can be completed in this term of office…
[abridged]… Finance Minister Bill English says the Government also has to deal with other issues, such as the Waitangi Tribunal report on water rights relating to the partial sale of Mighty River Power, and possible legal action.
Mr English says he is not taking it for granted that the Government will be able to complete the full programme this term. “
And as if that was not enough to put a spoke in the wheels, two corporate interests have recently made announcements that could have a significant impact on share prices for the remaining three SOEs; Mighty River Power, Meridian, and Genesis.
Norske Skog Tasman
” Norske Skog Tasman’s plan to halve newsprint production at its Kawerau mill will have implications for the power generation industry if it goes through with it, says an industry analyst.
The company, which accounts for about 2.9 per cent of New Zealand’s power demand, is looking at cutting its annual production to 150,000 tonnes from 300,000 tonnes because of dwindling domestic and offshore sales.
The analyst, who requested anonymity, said the partial closure would further extend the “significant” generation over-capacity in the New Zealand electricity market.
A 50 per cent reduction in Norske Skog Tasman’s electricity demand would equate to about one year of demand growth estimated in Ministry of Economic Development forecasts. “
By coincidence, Norske Skog buys most of its power from Mighty River Power, which is the first SOE that National plans to partially privatise.
Any potential “mum and dad” investors may be warned off from investing in MRP shares. If Norske Skog proceed with their plans, power consumption will decrease dramatically – and so will profits. Which will mean a cut in dividends paid to shareholders.
Tiwai Aluminium Smelter
Perhaps the ‘nastiest’ surprise for National and it’s Dear Leader was this announcement on 11 August from multi-national conglomerate, Rio Tinto,
” Meridian Energy’s announcement that it had been approached by New Zealand’s biggest power user, Rio Tinto, to discuss potential changes to its supply contract has created uncertainty for the Government’s plans to partly privatise the three power generators, analysts said.
State-owned South Island power generator Meridian said it had been approached by Pacific Aluminium, a business unit of Rio Tinto, the majority shareholder of New Zealand Aluminium Smelters (NZAS), to discuss potential changes to the electricity contract with the smelter.
The statement comes a time when Rio Tinto is assessing its options for the NZAS smelter at Tiwai Pt.
Tiwai takes about 15 per cent of New Zealand’s electricity, so the prospect of changes to the contract between Meridian and Rio was enough to send Contact Energy’s share price down 20c to $4.80 on Thursday.
Few in the financial markets expect Tiwai Pt to close, but if it did, much more power would be added to the national grid, depressing prices and affecting the profitability of all the power generators. “
Rio Tinto’s announcement immediatly sliced 20 cents off Contact Energy’s share price. What will it do to the three state owned power companies?
It’s hardly surprising, really. Everyone else appears to be putting their hand out, or up, to gain benefit from the asset sales – why not multi-national corporations who are already parked here in our country?
The Herald report goes on to say,
” Morningstar analyst Nachi Moghe said there was ongoing concern about the feasibility of Tiwai Pt and the possibility that it might eventually shut down.
“Obviously, if that happens it will hurt everyone, but it will hurt Meridian the most,” he said.”That additional supply will throw the supply-demand balance out of kilter.”
One fund manager said the news was a “bolt from the blue”.
In the contract negotiations, he said, the pressure could go on Meridian to reduce its price, or to reduce the volume of power it supplies, which would have an impact on the wholesale electricity market.
“It’s poor timing but great timing on behalf of Rio Tinto as we go into the mixed ownership model process,” said the fund manager, who did not want to be identified.”
Rio Tinto appears to be exploiting current uncertainties and confusion in the current environment. As pressure mounts on National from every direction, this appears to be an opportune moment for corporations to start flexing their own muscles.
Just what the Nats needed – their own corporate allies to shaft them at the worst possible moment.
Capitalism. Ya gotta laugh.
And the most critical factor to impact on the electricity generation industry: the weather.
This is something that even the “invisible hand” of the free market is utterly powerless to influence. Meridian’s profits have already been affected,
” The worst inflows into its hydro lakes for 79 years took a toll on Meridian Energy’s earnings in the year to June 2012.
The state-owned generator and electricity retailer yesterday reported a net profit after tax of $74.6 million, down from $303.1 million the year before.”
At this point, Dear Leader John Key might be starting to wonder. With all these ‘forces’ ranged against his Party’s plans to flog off our state assets – perhaps the Fates are trying to tell him something?
This blogger is surprised that China and Australia – both nations with which we have Free Trade Agreements – have not put their hands up to line up and buy shares.
After all, that is what FTAs are about. Legally, we might not be able to stop them.
Will we be hearing from our Chinese and Aussie cuzzies next?
Watch this space.
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Previous Blog post
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With the current National government on course to partially privatise Mighty River Power, Meridian Energy, Genesis, Solid Energy, and further down-sell of Air New Zealand, it may be an appropriate time to look back at our recent history and remind ourselves of a previous National Government’s blunders…
In 1999, Jane Kelsey wrote,
“The privatisatisation of local electricity supply companies and state-owned generators was also very lucrative and open to abuse to market power by transnationals. Driven by theory, governments had progressively dismantled the integrated state electricity system since 1986. This involved separating transmission from generation, splitting the state-owned generator into competing companies, and converting the elected non-profit power boards into profit-driven electricity supply companies. The Labour government began the process by corporatising the electricity department in 1986.
The local power boards were transformed into electric power companies in 1990, and into commercial electricity supply companies with diverse ownership structures in 1993.
A rash of hostile takeover bids and friendly mergers followed; during this time, supplying electricity seemed almost a sideline.
The main foreign-owned players were Alberta-based TransAlta and Utilicorp from Kansas. The companies raised their electricity prices to cover debt servicing and profit requirements. [My emphasis - FM]
The government expressed concern that electricity companies were abusing their monopoly over the power-lines and supply contracts to block the entry of competitors. The Electricity Industry Reform Act 1998, passed in July under urgency, prohibited any company from owning both electricity line businesses and retail or generation businesses from 1 May 1999.
Labour opposed the move, claiming the government had taken “an electricity industry that was working pretty well in practice and ripped it to bits, because it was not working well in theory”. The existing companies, supported by ACT, complained that the split reduced their value and amounted to expropriation. TransAlta threatened to pull out of the country if the government proceeded with the plan.
At the same time, the change created new opportunities for mergers and takeovers (at grossly inflated prices), consolidating control of electricity into fewer, and increasingly transnational, hands.
The government also split the state-owned generator into two companies, Contact Energy and ECNZ; ECNZ was later split into three companies.Contact Energy was publicly floated in March 1999. Some 175,000 local investors applied for priority registration. But the government had decided there had to be a 40 percent ‘cornerstone’ shareholder. Only two companies were in the final bidding – TransAlta and US-based Edison Mission Energy. TransAlta was already the country’s largest energy retailer, with 530,000 customers, and was returning a dividend of around 6 percent. In October 1998 the Ministry of Consumer Affairs condemned its customer contracts as ‘onerous and harsh on consumers’.
The Commerce Commission cleared TransAlta to take up to 50 percent of shares in Contact Energy. That would have given the company one million of the country’s 1.6 million electricity customers, control over two-fifths of New Zealand’s generating capacity, and rights to nearly half its gas production.
The strategic stake went instead to Edison, for $1.21 billion…
… Contact Energy ended up nearly 62 percent overseas-owned. In addition to Edison’s 40 percent, another 18 percent of shares were reserved for offshore institutions, 14.4 percent for New Zealand/Australian institutions and 27.6 percent for the New Zealand public. Investment anlyst Brian Gaynor calculated that half the shares issued to offshore institutions were sold for instant profit in the first three days. He partly attributed the priority given to offshore buyers to “broker self-interest”, estimating that they earned $7.6 million on the 109 million shares issued to northern hemisphrere institutions (much higher than the proportionate income from Australasian sales).
Gaynor questioned why government officials put so much effort into selling the country’s assets to foreign interests , thus worsening the balance of payments , instead of working to stimulate export growth. [My emphasis - FM]
The government insisted that the changes would lower electricity prices to consumers (although Commerce Minister John Luxton said ‘it was not promised that householders would necessarily get cheaper power’). But they failed to do so, as the companies sought to recoup their excessive spending. [My emphasis - FM]
In anticipation of winning the Contact Energy bid, TransAlta had paid $171 million for the retail business of Orion, owned by the Christchurch City Council; the operation was independently valued in 1997 at around $13 million. In March 1999 TransAlta announced price rises of between 5 and 15 percent for it’s 530,000 customers. Energy Minister Max Bradford blamed the line companies for abusing their monopoly and not passing on savings from the transfer of metering costs to the retail companies.Orion backed off its suggested price increase. TransAlta did not. Bradford insisted that competition among the supply companies would eventually force prices down, so only the monopoly line businesses needed regulation.
Back in 1998, Bradford had proposed only light-handed regulation: ‘to enhance the credibility of the threat of price control’, the Commerce Commissionwould be given powerto limit prices, where it was efficient to do so, and after a lengthy period of review. By May 1999 he had been forced to introduce legislation that could regulate monopolies generally, with specific provisions for line companies. The Commerce Commission would be required to authorise a price for line company charges by 31 December 1999 for the largest companies, and dates in 2000 for the rest.” – “Reclaiming the Future“, August 1999
There are many lessons to be learnt from the de-regulation and privatisation of the electricity industry in this country…
- In buying up companies, the new owners raised electricity prices for consumers so as to re-coup the costs of their multi-million dollar investments.
- Many of the electricity companies wound up in overseas investors’ control. As Brian Gaynor said, this made our Balance of Payments much, much worse – for no discerible, logical gain.
- Competition did not bring “cheaper power prices”. There simply was no competition.
It probably occurs to many people that, thirteen years later, another National Government is on-course to repeat the same mistakes.
“Those who cannot remember the past are condemned to repeat it”
“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.
“That’s an honest answer.” – Bill English, 17 February 2012
That may be an “honest answer” – but it also has to rank as one of the dumbest in New Zealand’s political history.
To explain what Bill English was being “honest” about,
That’s right, folks, our Finance Minister has just let slip that National has no idea how much money they will raise from the part-privatisation of Genesis Energy, Might River Power, Meridian, Solid Energy, and Air New Zealand.
They don’t have a clue.
The $5 -$7 billion they have been quoting pre and post election are figures seemingly plucked out of hot-air from Parliament’s oxygen-depleted atmosphere. (Oxygen depletion tends to have unpleasant side-effects on a brain such as confused, muddled, thinking.)
John Key – realising that Bill English had made National the laughing stock of the country – jumped in, changing the “best guess” to a “best estimate”,
However, Key didn’t help matters much when he added,
“I think they are our best estimates”.
“There are lots of variables in there … what we do know is the Crown will absolutely have a minimum of 51 per cent shareholding but could have more. We don’t know what price the market will pay at the time; we don’t know the exact timing of all these particular floats.”
So let’s see. Key and English don’t know any of the following,
- How much will be raised by the partial-privatisation?
- Whether they will end up with 51% ownership – or more?
- Or even the timing of the “floats” (sale of shares)?
- Or what price the shares will be sold at???
No wonder Greens co-leader Russel Norman said, in utter exasperation,
“That isn’t how we should be running the finances of New Zealand.”
Norman wasn’t playing usual political one-upmanship games – he was voicing the entire country’s disquiet at what is rapidly looking like mickey mouse incompetance.
Yet again this is an example of National simply not being up-with-the-play. Much like unaffordable tax-cuts of ’09 and ’10; the Jobs Summit of 2009 that achieved very little; the credit down-grade they “never saw coming”; the broken promise on raising gst; the $1.4 billion revenue short-fall – National’s economic policies seem to be ad-hoc at the very best.
If this was the Muppet Show, it might look something like this,
Instead, it looks like this,
clowns muppets are in charge of billions of dollars worth of public property?
I am not reassured. In fact, I wouldn’t trust these two to run a charity sausage sizzle.
I can imagine how that would end badly,
- 1 x sausage, @ 50 cents wholesale
- gas, onion, sauces, napkin, est. 50 cents per sausage
- Retail price: ?
40 cents 60 cents75 cents!
Cue: muppet theme & roll credits.
Other Blog stories
As well as trying to “quietly” drop all references to Treaty obligations, under Section 9 of the SOE Act 1986 – something guaranteed to buy a fight with their coalition partner, the Maori Party - there are other revelatory aspects of the draft Treasury document that should also be a matter of considerable concern.
“ The Government’s mixed ownership model
Intitial public offerings (IPOs)
An initial public offering, or share float as they are often called, is a way of selling some or all of a company to a large number of investors. Shares in the company are offered for sale to retail investors (individuals, sometimes referred to as “mums and dads”) through an advertising campaign to the public and through shareholders.” Source
“Intitial public offerings (IPOs)
Once a minority shareholding in each company is sold, the government proposes that the company will be governed in the same way as other listed companies and that they will be subject to the Companies Act 1993 and other relevant legislation, the NZX listing rules and the companies’ constitutions. The crown will not reserve any special rights to itself, except that it is still to decide whether it will a have any special power to approve the chairman of the Board, as it has for Air New Zealand.” Source
With regards to Paragraph 1, above, it is interesting that the Treasury report refers to “retail investors (individuals, sometimes referred to as “mums and dads”)“. In effect, it is a ‘slip’ on Treasury’s part, acknowledging the reality that “mum and dad investors” is simply propaganda “code” (newspeak) for common, garden-variety, investors.
There is nothing “mum and dad-ish” about corporate share-brokers working on behalf of investment companies.
Government uses the term “mum and dad investors” to hide the reality that shares in part-privatised SOEs will be purchased by individuals in dapper suits and silk ties, operating out of very nice offices, on behalf of Very Big Corporate Clients.
Government myth: busted.
Paragraph 2, above, is even more insidious and refers to, “Once a minority shareholding in each company is sold, the government proposes that the company will be governed in the same way as other listed companies and that they will be subject to the Companies Act 1993 and other relevant legislation…” and furthermoremore, “The crown will not reserve any special rights to itself…”.
In effect, once partially-privatised, the Government intends that none of the entire State Owned Enterprise will be governed by the State Owned Enterprises Act 1986. (Not just the privatised 49% part.)
Specifically, Section 4 of the Act,
Principal objective to be successful business
(1) The principal objective of every State enterprise shall be to operate as a successful business and, to this end, to be—
(a) as profitable and efficient as comparable businesses that are not owned by the Crown; and
(b) a good employer; and
(c) an organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so.
(2) For the purposes of this section, a good employer is an employer who operates a personnel policy containing provisions generally accepted as necessary for the fair and proper treatment of employees in all aspects of their employment, including provisions requiring—
(a) good and safe working conditions; and
(b) an equal opportunities employment programme; and
(c) the impartial selection of suitably qualified persons for appointment; and
(d) opportunities for the enhancement of the abilities of individual employees.
And most specifically, this part of it’s Principal Objectives,
“…an organisation that exhibits a sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so.”
Any committment to promoting clean, sustainable energy; considering the needs of the community in it’s activities; and other social responsibilities will all vanish if the SOEs concerned are “ governed in the same way as other listed companies and that they will be subject to the Companies Act 1993 and other relevant legislation… [and] …the crown will not reserve any special rights to itself…”
In the case of Genesis Energy, Mighty River Power, and Meridian Energy – their sole objective will be to make greater profits for government and private share-holders.
Those profits will be generated by raising power prices.
Guess who pays those higher power prices? (Clue: look in the mirror.)
Right about now, any person reading this who voted for National last year must be entertaining serious regrets at ticking “National” for the Party Vote. Those folk who voted for National – and conversely, those who failed to go out and vote for an alternative Party opposed to asset sales – must be wondering if they will end up paying for their voting choices.
Of course they will pay for voting National.
Every month. When their power bill comes in.
“What Mr Dunne gets:
- No sale of KiwiBank or Radio New Zealand.
- Statutory limits will be introduced on the sale of public asset to no more than 49 per cent of shareholding to private interests and limits would be put on the extent of single entity ownership.
- A ban on guided helicopter hunting on conservation land will be introduced to Parliament.
- The budgets of both Radio New Zealand and Television New Zealand will be maintained.
- The Families Commission will be revamped.
- There will be public consultation on Mr Dunne’s Flexi-Super policy.
- Guaranteed access to rivers, lakes, forests and coastline.
- An agreement to reintroduce Mr Dunne’s income sharing legislation which failed to win enough support in the last Parliament.
- Free health-checks for over 65-year-olds would also be investigated.“
Whoa…! Back up that coalition-pony, sonny boy!
“No sale of KiwiBank or Radio New Zealand“?!?!
Since when did National advocate or campaign on the privatisation of Kiwibank or Radio New Zealand?
In fact, John Key made it a campaign promise that Kiwibank was not up for sale, and that the only state assets on the block were Genesis Power, Meridian, Might River Power, Solid Energy, and Air New Zealand. No mention whatsoever of Radio NZ or Kiwibank.
What’s going on here?
Either Peter Dunne is telling fibs and creating a false “victory” – or else National had a secret agenda of further asset asales!?
Someone is misleading the public.
+++ Updates +++
The above article starts out positive and seemingly Dunne has succeeded in saving TVNZ7 from disappearing and being replaced by a shopping channel…
Until one reads this in the same piece,
“I would have preferred to have got a much more explicit agreement regarding the future of TVNZ 7 but the National Party wouldn’t go there.”
And Dunne then adds,
“TVNZ keeps saying it needs to run as a commercial body, and it obviously makes its own decisions, but I think it needs to recognise there is a significant chunk of the population that prefers the approach TVNZ 7 takes and would be very disappointed if that channel was to close.“
So he really hasn’t “saved TVNZ7″ at all. In fact, Dunne admitted as much this morning (Dec 6) on Radio NZ, when he said on “Morning Report“,
” …I wanted to get an absolute committment to the retention of TVNZ7. We weren’t able to get that. The government wasn’t prepared to make that, uh, concession…”
Ok, so let’s sum this up,
- Dunne get’s a promise from National that neither Kiwibank nor Radio NZ will be sold.
- But National never suggested selling Kiwibank or Radio NZ in the first place.
- So what kind of “victory” is it to get a committment on something that the Nats weren’t intending to do anyway?
- Dunne then negotiates to get an absolute committment to save TVNZ7.
- And fails.
Have I missed anything?
Moving right along…
“Free health-checks for over 65-year-olds” – ???
Great. More rip-offs from my generation, the Baby Boomers. Everyone else has to pay for health checks – but all of a sudden we get freebies?
Yet again Baby Boomers – being a sizeable bloc of voters – gain tax-payer funded social services whilst everyone else has user-pays.
No doubt these “free health checks” will be funded from that sale of state assets. Once again Baby Boomers are ripping off future generations for our own selfish benefit.
The word obscene comes to mind.
Email Peter Dunne to let him know what you think about asset sales:
“Peter Thomas Mahon was a New Zealand High Court Judge, best known for his Commission of Inquiry into the crash of Air New Zealand Flight 901 (“Mount Erebus disaster”). His son, Sam Mahon is a well-known artist.
Mahon began his legal career with the Raymond, Donnelly & Co. He was mentored by Sir Arthur Donnelly. Mahon was junior counsel for the prosecution in the Parker-Hulme murder case in 1954.
After the crash of Air New Zealand Flight 901 with loss of all aboard on 28 November 1979, an accident report was released by the chief inspector of air accidents, Ron Chippindale, which cited pilot error as the chief cause of the accident. Public demand led to the formation of a Royal Commission of Inquiry into the accident, consisting solely of Mahon. He produced his report on 27 April 1981, which cleared the crew of blame for the disaster and found that the major cause was the reprogramming of the aircraft’s navigation computer without the crew being notified. Mahon controversially claimed that Air New Zealand executives engaged in a conspiracy to whitewash the inquiry, covering up evidence and lying to investigators, famously accusing them of “an orchestrated litany of lies”. His book, Verdict on Erebus, an account of his inquiry, won the New Zealand Book Awards prize for non fiction in 1985.
Mahon retired from the High Court bench in 1982.
In 1983 the Judicial Committee of the Privy Council held that Mahon had acted in excess of his jurisdiction and in breach of natural justice by going on to make findings of a conspiracy by Air New Zealand to cover up the errors of the ground staff.
In 1985 Mahon was appointed as Commissioner of Inquiry into the 1984 Queen Street riot. In the same year he published “Dear Sam”, a collection of his letters to his children.
In 2008, Mahon was posthumously awarded the Jim Collins Memorial Award by the New Zealand Airline Pilots Association for exceptional contributions to air safety, “in forever changing the general approach used in transport accidents investigations world wide.”" – Source
“Justice Peter Mahon accused Air New Zealand of an “orchestrated litany of lies” in his finding on the cause of the crash of the DC10 aircraft on Mt Erebus on November 29, 1979, which killed all 257 passengers and crew.
In his report released in 1981 he said DC10 pilot Jim Collins was not told of a last-minute change to the flight path co-ordinates, and neither he, First Officer Greg Cassin, nor the flight engineers, made any error which contributed to the disaster during a sight-seeing flight.
Air NZ challenged Justice Mahon’s accusation of a “predetermined plan of deception” and the Court of Appeal overturned the finding, saying the judge had exceeded his terms of reference.
Justice Mahon resigned, and died in 1986 but his comments echoed around the world.
Now the New Zealand Airline Pilots Association (ALPA) said it would posthumously present Justice Mahon with the Jim Collins Memorial Award for exceptional contributions to air safety.
“It is for his sterling work, in forever changing the general approach used in transport accidents investigations world wide,” said ALPA executive director Rick Mirkin. ” – Source
“The one-man commission, the late Justice Peter Mahon, was slammed by Muldoon who refused to table his 1981 report which accused Air New Zealand witnesses of participating in an “orchestrated litany of lies” on the witness stand…
… Justice Mahon found a navigation computer had been incorrectly changed so the plane was programmed to fly into the mountain, and that Air New Zealand witnesses had lied to cover up other mistakes that pointed blame at the carrier.
Muldoon responded with venom – the findings were potentially fatal to the Government-owned carrier – while Air New Zealand prepared an appeal against the lying accusations in court.” - Source
“… Successive governments refused, year after year, to officially recognise Justice Mahon’s accident report which overturned the assertions, made by the Chief Inspector of Air Accidents Ron Chippindale, that the pilots were culpable. With unassailable logic, Mahon proved him wrong. Justice Mahon’s report was eventually tabled in Parliament and became an official document in mid 1999, thanks to the efforts of Hon Maurice Williamson.
“That report absolutely clears the pilots of any blame. Yet confusion about what caused the accident remains in the minds of New Zealanders. It was to the advantage of many men in government, in Civil Aviation and in the airline that this confusion reigned for so long… ”
When the plane crashed, Captain Jim Collins left behind a wife and four young daughters. As well as examining the technical arguments around the cause of the crash, the book looks at the intensely personal impact the tragedy had on them…
Speaking on behalf of the family, Kathryn Carter, who was 15 at the time of the crash, says, “Our father and his co-pilot, Greg Cassin, were cleared of all blame by the Royal Commission. We want that to be understood and accepted by Parliament once and for all, and for it to be accurately recorded for New Zealand’s history.”” – Source
Justice Peter Mahon. He arrived at the truth surrounding the Erebus Crash in 1979 – but it was an Inconvenient Truth, and it upset many powerful people in high places. The highest, it might be said, was the authoritarian Prime Minister of the day, Robert Muldoon.
Armed with nothing but his integrity and the truth he had uncovered, Justice Mahon stood against them all. I believe he will be remembered as one of New Zealand’s finest, most heroic people.
R.I.P. Peter Mahon, for you were an Honourable Man.
In a somewhat weak attempt to allay fears over National’s stated intention to partially-privatise several state assets, Bill English has stated that he “believes only 10 to 15 per cent will initially go to overseas buyers”.
However, tellingly, National refuses to actually pass any legislation to prevent this from happening;
National says it will “cap” single investor’s holding to 10%.
But National refuses to explain how it will engineer this “cap”.
It doesn’t take a rocket scientist to figure out that a corporation could easily employ five “shelf companies“, each buying a block of 10% of the shares. These “dummy” companies would each own a block of shares – in name only. The parent company – owning each dummy company – would be the real owner.
Result: a foreign corporation owning a sizeable chunk of each SOE.
Case in point: Contact Energy.
In 1996, Contact Energy was split of from it’s parent SOE, Electricity Corporation of New Zealand and fully privatised in 1999 as part of the then-National Government’s plan to “reform” the energy sector and make it more “competitive”. Energy Minister, Max Bradford,. assured New Zealand that the splitting up of ECNZ, and privatisation of Contact Energy, would introduce competition and drive prices down.
The opposite actually occurred and power prices doubled during the following decade.
When Contact Energy was privatised in 1999, 40% of the publicly offered shares were purchased by Edison Mission Energy. That 40% was subsequently increased to 51%. Edison Mission started with a minority shareholding – which was soon increased to a majority sharehold. (Starting to sound familiar?)
In 2004, Edison Mission sold it’s 51% stake to Australian company, Origin Energy.
“The terms of this float were such that sharebrokers earned a greater commission from issuing shares to overseas shareholders than they did from issuing them to local shareholders. Many of the shares went to shareholders overseas (Gaynor, 1999). After the float, Gaynor assessed Contact as about 62% overseas owned.” Source
In reality, despite “assuring noises” made by Bill English and John Key, there is no way to prevent much of the proposed 49% sell-off of the SOEs, from falling into foreign ownership. This will not help New Zealand’s balance of payments, as profits are repatriated overseas, to offshore investors. It will mean that our most critically strategic assets will have owners who have no interest in New Zealand, except as a source of profits.
And importantly, we will lose approximately half of the profits made by these SOEs.
In 1999, Max Bradford promised New Zealanders that power prices would be “driven down” by competition.
That promise failed to materialise.
This year, English and Key promise that “only 10% to 15%” of shares will go to overseas investors.
Do we believe them sufficiently to “tick National” at this year’s general election?
I certainly will not.
John Key today announced that the proceeds from state asset sales could be used for roading…
Now hang on a mo’…
I thought National was intending to part-privatise Meridian Energy, Genesis Energy, Mighty River Power, coal miner Solid Energy, and Air New Zealand to pay off some of the $71 billion debt that National has racked up since it came to office in 2008?!
Now Key is suggesting that National may use the proceeds to pay for roading? Strangely enough, Key makes no mention of selling state assets to fund infra-structure here.
The questions that spring to my mind are;
1. Where is the income from Road User charges, gst on fuel, and other roading-related taxes that we are paying every time we fill up our vehicles at the pumps???
2. Wouldn’t it make more sense to use the profits from Meridian Energy, Genesis Energy, Mighty River Power, coal miner Solid Energy, and Air New Zealand, for infra-structure spending – rather han the actual generators of those profits???
3. If National has to rely on asset sales for infra-structure spending – what will they be relying on once all state assets are privatised and we’ve lost the entire income-stream???
This is like a heroin addict selling his car to pay for his next ‘fix’. What will he sell next? And what will he do once all his possessions are gone?
It’s not exactly a “good look” when a government behaves like a drug addict.
As for the good people of Kapiti – they got the government they voted for. It’s hard for me to feel any sympathy on this issue. My thoughts are with the 140 people who lost their jobs at MAF today. Or the thousands of others who’ve been made redundant these last three years.
My anger is directed at those individuals who blame welfare beneficiaries for the predicament they are in. The finger-pointers who blame the poorest and most vulnerable for daring to be poor and vulnerable.
To the people of Kapiti; you helped elect this government to office. You now have a wee taste of what it feels like to be steam-rolled and to be victimised.
Remember this on 26 November.
Don Brash, on Q+A today (21 August),
“Nobody seriously believes that Governments run commercial business better than private owners do. There is no logic at all for Governments to continue to own them.”
Let’s do a Fact Check on your claim that “nobody seriously believes that Governments run commercial business better than private owners do”.
Case # 1: Air New Zealand.
In April 1989 the airline was privatised by Roger Douglas with a sale to a consortium consisting of; Brierley Investments Ltd(65%), Qantas (19.9%), Japan Air Lines Ltd (7.5%), and American Airlines Ltd (7.5%) .
The owners were a fairly high-powered, supposedly commercially-saavy, group of corporations.
The sale went through, earning the State $660 million.
In 2000, Air New Zealand entered into a commercial deal to buy 100% Ansett Airlines, for $A680 million, from Rupert Murdoch’s News Corporation Ltd. This deal went sour and Ansett Australia was placed into liquidation by September 2000. Air New Zealand subsequently announced a $NZ1.425 billion operating loss .
By October 2001, Air New Zealand was itself in imminent danger of collapsing and was re-nationalised by the then Clark-led Labour government under a NZ$885 million bail-out. The government ended up with a 76.5% stake.
So much for private ownership.
Case #2: NZ Rail
In September 1993, NZ Rail was privatised and sold for $400 million (less debt) to a consortium consisting of Wisconsin Central (40%), Berkshire Partners III L.P. (20%), and Fay & Richwhite (40%). NZ rail then had a succession of owners, culminating in heavy losses, with a $346 million loss for the half-year ended December 2003.
In May 2008 the Labour Government agreed to buy Toll NZ Ltd (less its trucking and distribution operations) for $665 million.
This experiment in privatisation was also a spectacular failure. No private owner could make a profit, even with the government agreeing in 2003 to spend $200 million over the following five years, upgrading the track via the new SOE, Ontrack.
The rail network had been badly run down through lack of investment in new rolling stock and lack of basic maintenance. And one of it’s first private owners, David Richwhite were investigated late 2004, by the NZ Securities Commission, regarding alleged insider trading. In June 2007 Richwhite agreed to pay NZ$20 million, but did not admit liability.
Another “Tui time” for private ownership of state assets.
Case #3: Finance Companies.
It might be worthwhile reminding Don that the recent chain of collapse of finance companies in this country cost investors $6 – $8 billion dollars in losses . Many of these are the real “Mums and Dads” investors that National speaks lovingly when mooting asset sales.
So Don, spare us the rhetoric that “nobody seriously believes that Governments run commercial business better than private owners do”. Because as many will confirm – that’s bullshit.
The question I ask myself is; Don, do you really believe that fantasy or not. If you do, you are deluded. If you don’t, you are deliberately mis-representing the truth.
Either way – not a good look, mate.
State-Owned Enterprise (SOE), Air New Zealand seems to be doing better than it’s private owned corporate-cuzzies. Not bad for a company that is 76.5% owned by the people of New Zealand, through the State. (It’s not the sort of thing that Free Marketeers care to think of too much – gives them headaches.)
In fact, of the Top Ten rankings, the top two are SOEs; one, Shell NZ, is now owned 50% by New Zealand Superannuation, and another, ZESPRI, is a form of growers’ co-op. Air New Zealand was re-nationalised in October, 2001, by the then-Labour Government.
Had the government not stepped in with it’s rescue package, Air New Zealand would have collapsed, throwing transport and freight services into chaos. Since then, Air New Zealand had been both profitable for the State and popular with travellers.
Not bad for collectively-owned corporations, eh? Who sez that We, The People can’t own successful enterprises?
1 Air New Zealand
2 New Zealand Post
3 Fisher & Paykel
5 HJ Heinz
6 The Warehouse
7 Goodman Fielder
9 Shell NZ