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.
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