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Solid Energy and LandCorp – debt and doom, courtesy of a “fiscally responsible” National Govt

28 December 2015 3 comments

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solid-energy-chief-executive-don-elder-and-hon-bill-english-at-mataura-9-sept-2011

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In May 2013, I first reported on National’s gutting of Solid Energy, detailing how Finance Minister Bill English and then-SOE Minister, Simon Power, had used the State Owned Enterprise as a cash-cow, to assist the government to balance it’s books;

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Solid Energy – A solid drama of facts, fibs, and fall-guys

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The story details National’s ministerial interference on Solid’s Energy’s financial affairs; under-mining (pun unintended) it’s bio-fuels programme; and extracting huge dividends, as well as taxes paid, to fill government coffers.

At the end, as Solid Energy teetered on collapse, National ministers did what National ministers do in time of crisis; they blamed others for the crisis;

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Prime Minister criticises Solid Energy

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Solid Energy was in debt. But not to “diversify” as Key claimed. The Prime Minister lied.

The debt was due in large part to Ministerial demands that Solid Energy borrow BIG, and pass those borrowings onto the government. This was a piece of accounting trickery, so National could claim, hand-on-heart, that it was not borrowing billions more. In actuality, the SOEs were doing the borrowing, and then passing the cash on to it’s shareholder, the government. This was borrowing-by-proxy by the government.

That is how desperate National was to claw back as much lost revenue due to the Global Financial Crisis/Recession, and unaffordable two tax cuts (2009, 2010) which they had promised during their 2008 election campaign and which has cost government an estimated $4.5 billion annually.

In 2009, English instructed all SOEs to increase their debt. This Statement of  Corporate Intent is clear in National’s expectations;

I would like all SOEs to increase their gearing from current levels, to a level more consistent with a BBB flat credit rating. In this regard, I have been advised by officials that Solid Energy may have the capacity to sustain a 40% gearing ratio.

I urge the Solid Energy Board to give serious consideration to this proposal, and to release all surplus capital to the shareholder as special dividends. “

Not only was National instructing SOEs (including Solid Energy) to borrow more (and then pass the cash on to the Government’s Consolidated Fund), it was also openly raiding their bank accounts by demanding “all surplus capital to the shareholder as special dividends“.

Furthermore,  not only were English and Power expecting higher profits diverted from SOEs, they  demanded two dividends per year instead of just one;

“I would also like to standardise and simplify the dividend policy for all SOEs, to ensure that a larger and more consistent share of profits is returned to the Crown as shareholder.

In this regard, I propose that the Solid Energy Board give serious consideration to adopting a dividend policy equal to 65% of operating cash flows (including net interest paid) from 1 July 2009.

Related to dividend policy, I wish to outline an expectation that all SOEs pay two dividends per year, an interim and a final dividend.”

On  18 August 2009, Bill English met with Solid Energy’s then-Chairperson, John Palmer. After that meeting, Solid Energy increased its gearing (borrowing/debt) from around 25% to 35%, and changed the way it  accounted for mine rehabilitation costs.

This was a cash-grab on an unprecedented scale, and one that went largely un-noticed by media, Parliamentary Opposition, and the public.

On 13 March 2013, soon after Solid Energy’s massive $389 million debt became public, English was forced to concede that  National has mishandled governance of Solid Energy;

“The decisions about how much debt to incur was made by the board.

In Solid Energy’s case it turned out that a company operating in the world coal market, which is now so volatile, would have been better off with no debt – in retrospect that’s easy to see, at the time it wasn’t.”

However, in claiming that “decisions about how much debt to incur was made by the board“, the Finance Minister lied.

Solid Energy had been directed to increase it’s debt by Ministers English and Power – not by the SOE’s Board. The Treasury document above are a paper-trail evidencing National’s determination to increase it’s revenue at any costs (literally).

Both Key and English have consistently lied on this issue.

More recently, on Radio NZ’s Morning Report, on Friday 14 August, Guyon Espiner interviewed Finance Minister, Bill English, on Solid Energy’s corporate demise.

At one point, under persistent questioning by ‘Checkpoint‘ host, Guyon Espiner, English admitted National’s role in Solid Energy’s financial woes;

Espiner: But I’ll tell you what you also did, and you’ll remember this well in 2009, you looked at the balance sheets of SOEs and you decided that many of them could carry more debt and in fact you presided over a massive expansion in Solid Energy’s debt and in formal letters your government encouraged them to significantly increase their debt. That was a mistake wasn’t it?

English: Well, at the time it was valued, well actually that time, was valued about $3 billion and they took debt up to $300 million. It was a… As it turned out it was the pressure that put on the cash flow, well, the issues it raised, that got the government and, ah, the officials differing with the Board and that’s all on the record.

Espiner: Yes, so why did you, because you took their gearing ratio from about 14% in 09 up to 35% in 2010, 41% in 2012. So you presided, in fact, encouraged Solid Energy to take on the debt that they have eventually drowned in.

English: Well we worked with the Board over , over making sure the Crown was actually getting something out of the business. Um, certainly, in retrospect the debt levels got too high [garbled].

Espiner: So do you take the blame for that? Because, you failed there. You encouraged them to take on more debt and they’ve drowned in it.

English: Ahh, between us and the company, yes, we’re responsible for that.

There we have it. Under Espiner’s persistant questioning and quoting of facts, English had no place to hide; no one else to blame; and no lies he could resort to.

English had admitted that his government had gutted Solid Energy, and used it as a proxy for borrowing.

Then, under further questioning, English made one of the more bizarre assertions ever made by a politician (incest, chem-trails, and  moonlanding hoaxes notwithstanding);

Espiner: What about the dividend programme? You stripped more than $160 million in dividends out of this company over four years. Was that a good thing to do, given the state of the company, and couldn’t if they’d reinvested that money in the company been in some sort of position to keep the thing afloat?

English: Ah, no, precisely the opposite. And this has been the case with SOEs for years. If you leave the cash in there, generally, ah, they waste it. And, ah, in fact, one of the interactions here was we required a dividend because it was a company that was making money –

Espiner: Well hang on. Sorry to interrupt you but that’s an extraordinary statement to make, ‘You leave the cash in there and they waste it’?

National, of course, never wastes money. They never waste money on subsidising Rio Tinto; subsidising SkyCity; subsidising Charter Schools; subsidising Hollywood corporations like Warner Bros; subsidising Saudi businessmen to the tune of $11.5 million. Nor does National waste money on two tax cuts which were utterly unaffordable, being funded by  heavy overseas borrowing.

Espiner quite rightly mocked English’s ludicrous justification for government looting of Solid Energy;

Espiner: So it was better for you to take the money out, put it in the Consolidated Fund, let the company take on more debt, and they’ve eventually blown up.

This is the party that many New Zealanders believe is a “fiscally responsible manager of our economy”?!

Unfortunately, National’s mis-management does not end there.

The latest SOE to disclose financial difficulties is Landcorp;

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Landcorp in 'pretty tight situation' – English

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Landcorp’s current liabilities amount to $359 million, whilst it’s assets amount to $1.846 billion, according to the company’s half-yearly statement.

What is not mentioned anywhere is that, according to a document from Treasury’s Crown Company Monitoring Advisory Unit (CCMAU), the National Government sent a letter to Landcorp’s Board  making similar demands for higher dividends that it made to Solid Energy;

Firstly, as the CCMAU chart below shows, National’s expectations were that Landcorp increase its “gearing” (borrowed funds against a company’s equity) from 11% to 20% – a near doubling;

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CCMAU - SOE gearing and dividend expectations - national government

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Note also that National demanded 75% of Landcorp’s net operating profit as a dividend; two dividend payments per year;  and  as much as  100% of operating cash flow.

In a 2009 letter to Landcorp, Ministers Bill English and Simon Power demanded the following from the SOE’s Board;

“I am minded to increase the gearing of all SOEs from current levels, to a level more consistent with a BBB flat credit rating. In this regard, I have been advised by officials that Landcorp may have the capacity to sustain a 20% gearing ratio. I urge the Landcorp Board to give serious consideration to this proposal, and to release all surplus capital to the shareholder as special dividends.

I am also minded to standardise and simplify the dividend policy for all SOEs, to ensure that a larger and more reliable share of profits is returned to the Crown, as shareholder. In this regard, I propose that the Landcorp Board gives serious consideration to adopting a dividend policy equal to 100% of operating cash flows (including net interest paid) from 1 July 2009.

Related to dividend policy, I wish to outline an expectation that all SOEs pay two dividends per year, an interim and a final dividend.”

In the same letter, English and Powers  outlined revising “the land sale moratorium imposed on Landcorp as part of the Protected Land Agreement (PLA)“.

The letter to Solid Energy followed the same pattern;

I would like all SOEs to increase their gearing from current levels, to a level more consistent with a BBB flat credit rating. In this regard, I have been advised by officials that Solid Energy may have the capacity to sustain a 40% gearing ratio. I urge the Solid Energy Board to give serious consideration to this proposal, and to release all surplus capital to the shareholder as special dividends. I note that Solid Energy currently has a gearing target of 35%, including the company’s rehabilitation liability as if it were debt.

Given that the nature of the rehabilitation liability is significantly different from debt, I am sceptical that this is an appropriate treatment. I have asked my officials to engage with you on this issue.

I would also like to standardise and simplify the dividend policy for all SOEs, to ensure that a larger and more consistent share of profits is returned to the Crown as shareholder.

In this regard, I propose that the Solid Energy Board give serious consideration to adopting a dividend policy equal to 65% of operating cash flows (including net interest paid) from 1 July 2009.

Related to dividend policy, I wish to outline an expectation that all SOEs pay two dividends per year, an interim and a final dividend.

Almost identical letters. Except for the 20% gearing ratio, which differed from Solid Energy’s more onerous 40%, the demands placed on Landcorp were the same; high gearing (borrowing); higher dividends; and all surplus cash to be paid over to the Crown.

National was looting every SOE of every spare dollar.

The questions now demanding  answers;

  • How many other SOEs have been left in a similar parlous state to Solid Energy and Landcorp?
  • How much damage has been caused to SOEs due to unreasonable dividend and cash demands made to their Boards?
  • How much longer are New Zealanders willing to maintain the fiction that National is a “prudent fiscal manager of the economy”?

And the last question;

  • Which SOE will be next to disclose a dire financial state?

For Bill English and John Key, a whole bunch of chickens have suddenly come home to roost.

Some very, very expensive chickens.

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References

Radio NZ: Prime Minister criticises Solid Energy

Green Party: Asset sales bring in less than cost of National’s tax cuts to top 10%

Treasury: Solid Energy Information Release March 2013 (Document 1875419)

Treasury: Solid Energy Information Release March 2013 (Document 1732352)

TV3 News: Solid Energy was allowed to increase debt

Radio NZ: Morning Report – English defends Govt’s record over Solid Energy (alt. link)

TV3 News: Landcorp in ‘pretty tight situation’ – English

New Zealand Farming Landcorp Farming Limited: Half year report for the six months ended 31 December 2014

Additional

Radio NZ: When is an asset sale not an asset sale?

Previous related blogposts

The real cause for Solid Energy mass redundancies?

Dirty Dealings with Solid Energy

That was Then, This is Now #18 (Solid Energy)

Dear Leader Key blames everyone else for Solid Energy’s financial crisis

Dear Leader Key blames everyone else for Solid Energy’s financial crisis (Part Rua)

Mediaworks, Solid Energy, and National Standards

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National caught out over Solid Energy – changes story on coal prices, debt, and other matters

13 March 2013 19 comments

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SOEs

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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.

They blamed;

  1. Solid Energy mis-reading trends in coal prices
  2. The previous Labour government
  3. The Board and management of Solid Energy
  4. The Global Financial Crisis
  5. Mrs Teagle, the tea-lady
  6. Sunspots

Everyone was to blame. National’s hands were clean. The world is a bad place.

So, let’s go through the points above.

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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.

Source: Solid Energy got coal price wrong: Key

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.

Source: Bill English & Tony Ryall – Statement on Solid Energy

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.

Source: Debt-laden Solid Energy talking to banks

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.

Source: Labour says Govt forced Solid Energy to borrow more

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.

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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.

Source: Parliament Questions and Answers – March 13

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.

Source: Parliament Questions for oral answer: 5. Solid Energy—Former Chief Executive

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.

Source: Solid Energy bail-out cost likely to rise

Really?

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.

See: Govt accused of milking Solid Energy for dividends

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.

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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-styleDear 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.

Source: Govt blocked grandiose Solid Energy plans in 2009

“The company did have the right to draw down debt and make investments without shareholder authority” up to a certain level, Mr Key says.

Source: Govt blocked grandiose Solid Energy plans in 2009

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.

Source: Editorial: Solid Energy excuses fuel anger

And then, on 13 March – the bombshell,

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Labour says Govt forced Solid Energy to borrow more

Source

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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,

  1. 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.
  2. 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.
  3. 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?
  4. 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.

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References

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)

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How Can A Minister of Finance Get It So Wrong???

28 February 2012 4 comments

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Five days ago, Finance Minister Bill English released a statement on the part-privatisation of several State Owned Enterprises. It is worthwhile re-printing his statement in full, and responding to it, point-by-point,

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Running up $5-$7b more debt not the answer

by Hon Bill English, Finance
23 February 2012

Opponents of the Government’s mixed ownership programme need to explain to New Zealanders why it would be better to borrow an extra $5 billion to $7 billion from overseas lenders, Finance Minister Bill English says.

Speaking to an Auckland Chamber of Commerce and Massey University business lunch today, he said the challenge was how the Government pays for forecast growth in taxpayers’ assets over the next few years.

“Taxpayers own $245 billion of assets, and this is forecast to grow to $267 billion over the next four years. So we are not reducing our assets. Our challenge is how we pay for their growth, while getting on top of our debt.”

The rationale for offering New Zealanders minority stakes in four energy companies and Air New Zealand is quite simple, Mr English says.

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

“Our political opponents need to honestly explain to New Zealanders why it would be better to borrow this $5 billion to $7 billion from overseas lenders at a time when the world is awash with debt and consequent risks.

“We would rather pay dividends to New Zealanders on shares they own in the energy companies than pay interest to overseas lenders on more borrowing.

“The fact is, the Government is spending and borrowing more than it can afford into the future. So it makes sense to reorganise the Government’s assets and redeploy capital to priority areas without having to borrow more.

“Most nights on television, we see the consequences of countries in Europe and elsewhere borrowing too much. We don’t want that for New Zealand.”

Secondly, under the mixed ownership programme New Zealanders will get an opportunity to invest in big Kiwi companies so they can diversify their growing savings away from property and finance companies.

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

Thirdly, mixed ownership will be good for the companies themselves, Mr English says.

“Greater transparency and oversight from being listed on the stock exchange will improve their performance and the companies won’t have to depend entirely on a cash-strapped government for new capital to grow.

“We already have a living, breathing and successful example of mixed ownership in Air New Zealand, which is 75 per cent owned by the Government and 25 per cent by private shareholders.”

In his speech, Mr English reiterated the Government’s economic programme this term would focus on rebuilding and strengthening the economy.
It’s main priorities are:

  •     Responsibly managing the Government’s finances.
  •     Building a more productive and competitive economy.
  •     Delivering better public services within tight financial constraints.
  •     Rebuilding Christchurch.

“So there will be no big surprises from this Government,” Mr English says. “We have laid out our economic plan and Budget 2012 will focus on implementing that plan.”

Source

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Firstly, let’s call a spade, a spade here. Whilst National ministers use the euphemistic term, “mixed ownership model”, the issue here is partial-privatisation of state owned enterprises.  National’s spin-doctors may have advised all ministers and John Key to always use the phrase “mixed ownership model” – but the public are not fooled.

To begin, I take great exception to English’s opening statement,

Opponents of the Government’s mixed ownership programme need to explain to New Zealanders why it would be better to borrow an extra $5 billion to $7 billion from overseas lenders…”

Opponants of National’s part-privatisation do not “need to explain” anything. It is up to National to explain why it feels the need to part-privatise tax-payer owned corporations that are efficient and give a good return to the State.

Demanding that the  opponents of the Government’s mixed ownership programme need to explain” their opposition is the height of arrogance.  Governments in western-style democracies are accountable to the public – not the other way around.

English then goes on to say,

Taxpayers own $245 billion of assets, and this is forecast to grow to $267 billion over the next four years. So we are not reducing our assets. Our challenge is how we pay for their growth, while getting on top of our debt.”

Pardon?

“…we are not reducing our assets” ?!?!

Selling 49% of Genesis, Meridian, Solid Energy, Might River Power, Air New Zealand (from 75% to 51%) down to a 51% holding is “not reducing our assets” ?!?!

Bill English’s command of his namesake language is strange at best. I believe this is what George Orwell wrote about in his dystopian novel, “1984“, when he described “doublethink“,

To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them…”

English laments that “our challenge is how we pay for their growth, while getting on top of our debt”.

This involves two distinct issues;

Paying for the growth of state assets.

Genesis, Meridian, Solid Energy, Might River Power,  and Air New Zealand are all profitable enterprises in their own right. In the 2010 financial year, these  assets made a combined profit of $581 million dollarsNone of these five SOEs are loss-makers.

They can each pay for whatever growth programme they require, using their profits.

Where National interfered in SOE operations, the results were highly distorted,

Genesis paid out no dividend and had a zero yield on its operating profit of $293 million.

It had a 30.5% shareholder return on total assets.

Meridian had a dividend yield of 10.4%, achieved by paying out 428.8% of its profit. The increase came from the $300 million special dividend it received during the sale of Tekapo A and Tekapo B stations to Genesis, which was forced by the Government to borrow to pay for the purchase.” – Source

The reason that there is a  “challenge [in] how we pay for their growth”  is simple: National demands high dividends from these  SOEs (often by forcing them to borrow) leaving little for the companies to reinvest in their own growth.

Under-funding is a problem only because National has created the problem.

Getting on top of debt.

Linking  New Zealand’s $18-plus billion dollar debt to funding the growth of SOEs is  deliberate sophistry (ie; a deliberate deception).

The reason we have out-of-control debt is because,

As a society and as an economy, we had no control over the first two crises to hit us.

But we sure had control over our taxation policy, and doling out generous tax cuts to millionaires and wealthy businesspeople was a luxury we could not afford. (Many maintain that National was “rewarding” certain affluent socio-economic groups for electoral support at the ballot box.)

Next. English states,

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

???

National appears confused (as with most of its ad hoc policies) as to the proceeds it may gain from the partial sales. Only a year ago, Key stated authoritatively,

“If we could do that with those five entities … if we can make some savings in terms of what were looking at in the budget and maybe a little on the upside you’re talking about somewhere in the order of $7 to $10 billion less borrowing that the Government could undertake.” – John Key, 26 January 2011

Then again, as recently as eleven days ago, English let slip that,

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

The best description of Key and English on asset part-sales: clueless.

It is also worrying that National is selling state assets to pay for  “other public assets like modern schools and hospitals, without having to borrow in volatile overseas markets“.

Every householder will tell you that if  you have to sell of your furniture; whiteware; tv, family car, to pay to maintain your home – then you are in deep financial trouble.

What National is doing is “selling the household furniture to pay for painting the house”.  Selling off assets to pay for maintenance is not sustainable – eventually you run out of stuff to sell. It is a really dumb idea.

But more than that, it indicates that National is not “earning” enough, by way of taxation revenue to pay for it’s house-keeping. If we have to borrow or sell assets to do simple things like paint schools or properly resource hospitals – then it is a fairly clear indication that taxation revenue is insufficient for day-to-day operations of public services.

It also indicates that we are paying for the 2009 and 2010 tax cuts by selling state assets.

This is not “fiscal prudence” – this is foolish profligacy.

Bill English again demands, in his speech,

Our political opponents need to honestly explain to New Zealanders why it would be better to borrow this $5 billion to $7 billion from overseas lenders at a time when the world is awash with debt and consequent risks.”

No,  Mr English. Perhaps you should “honestly explain to New Zealanders” why you believe it makes greater commerciall sense to part-sell  profitable assets that are returning a higher yield on investment, than what the government pays to borrow?


The Government is estimating a $6 billion reduction in net debt after the sale of the state-owned enterprises – but concedes the savings on finance costs will be less than what it would have booked from dividends and retained earnings if it kept them.

Treasury  forecasts released today in the Government’s budget policy statement outline the forecast fiscal impact of selling up to 49 per cent in each of the four State-owned power companies – Mighty River Power, Meridian, Genesis Energy and Solid Energy – and by reducing the Crown’s current shareholding in Air New Zealand.

They assume a price of $6 billion – the midpoint in previous estimates of a $5 billion to $7 billion sale price – and a corresponding drop in finance costs of about $266 million by 2016.

But the trade-off is the loss of an estimated $200 million in dividends by 2016 and the loss of  $360 million in forecast foregone profits in the same year.

Documents supplied today state that the overall fiscal impact of selling a partial stake in the SOEs is a reduction in net debt, but the Government’s operating balance will also be smaller, because foregone profits would reduce the surplus.” – Source


Yet, only a year ago, Bill English was forced to concede that state owned power companies were indeed, highly profitable. In fact, he was complaining bitterly about State-owned generators  “earning excessive returns”,

Generally the SOE model has been quite successful in that respect. But if you look at those returns being generated particularly out of the electricity market, the Government has taken the view that that market is not as competitive as it should be.” – Source

The State will be losing money on the deal; earning less dividends from the SOEs than the cost of borrowing. The sums simply don’t add up.

There also seems to be some confusion (no longer a surprise) as to what National intends to do with sale proceeds.

On the one hand Bill English sez he wants to reduce debt,

We are firmly focused on keeping the Government’s overall debt as low as possible and that is the most important consideration over the next few years.” – 16 February 2012

And a week later, English is spending it,

First, the Government gets to free up $5 billion to $7 billion…  to invest in other public assets like modern schools and hospitals…”  – 23 February 2012

I guess Mr English is hoping that no one is paying attention?

Further in his speech, English makes this rather candid admission,

The fact is, the Government is spending and borrowing more than it can afford into the future. So it makes sense to reorganise the Government’s assets and redeploy capital to priority areas without having to borrow more.”

And there we have it, folks: the clearest statement yet from our Minister of Finance that the partial-sale of our state assets has little to do with giving “mum and dad” investors a share in our power companies; or making them more efficient; or paying down any of our $18+ billion debt; or putting a new coat of paint on your local school – the government is desperate to raise cash because it  “is spending and borrowing more than it can afford “.

The tax cuts of 2009 and 2010 were never “fiscally neutral” as National kept insisting.

The “tax switch”  left a $1.4 billion “hole” in the government’s revenue and this is how they are attempting to “plug that hole”.

We have been conned.

The tax cuts will be funded by the sale of state assets that we, as citizens of this country, already own. And because the bulk of tax cuts benefitted the highest income earners/wealthy – who are also in a better position to acquire shares in Genesis, Meridian, Solid Energy, Might River Power,  and Air New Zealand – the transfer of wealth from low and middle income earners will be two-fold.

The legacy of John Key’s government will be to make the rich richer, and for the rest of us, we can look forward to,

  • more expensive power
  • losing half ownership of our taxpayer-created state assets
  • and the top 10% to increase their wealth even more

But, to be generous, I will leave the last word to the Hon. Bill English,

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"Would you be willing to increase the mortgage on your house to go and borrow the money to buy shares on mighty river power?" Bill English, 16 February 2012

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We have one year

14 December 2011 Leave a comment

… before John Key sells our first publicly-owned, state asset,

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Full Story

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In that one year, the government will be highly vulnerable to the following,

  • A growing public resentment and opposition to asset sales, putting pressure on National MPs – especially those like Nicky Wagner   (Majority: 47)  and  Nikki Kaye     (majority: 717 )    – who stand to lose their respective electorate because of narrow majorities.
  • Public pressure on Peter Dunne.
  • A defection from National’s ranks.
  • A by-election should one of National’s MPs be forced to resign for whatever reason. There were four by-elections, during the previous Parliamentary term.

John Key must be praying that every single one of his MPs remains healthy; scandal-free; and dedicated to the National Party.

It would take the loss of only one MP from National’s ranks for Key’s house-of-cards to come crashing down.

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The Great New Zealand Scam

19 November 2011 1 comment

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Never mind Nigerian scammers – we have something much closer to home, and is the biggest rort ever. What do retirement policies and asset sales have in common? Plenty!

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Full Story

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One commentator to the story above posted this message on Stuff’s messageboard,

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cm   #47   11:48 pm Nov 18 2011

All this shows is who votes, and in numbers.

the boomers stand to loose the most from a retirement age increase. The boomers stand to gain the most from asset sales.

come on gen y, x, z what ever the demographs call you. get out and vote before the baby boomers (your own parents/grandparents) sell you and your future out. its pretty damn simple, if you over 20 you arnt a child anymore, your an adult. so act like you give a damn about your futures and stop believing the bullshit that your parents will look after you, put that on a tui bill board.

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CM has pretty well identified how Baby Boomers are going to “internalise a complicated situation” by voting National even though, on the surface, they have an alleged dislike of asset sales.

It is a perfect analysis of what is about to happen on 26 November: the Baby Boomer generation is about to ‘steal’ property from the next generation, for their own gain.

Instead of our generation paying it’s way through taxation, we’ve voted tax cuts for ourselves (2009, 2010) and big borrowings from overseas to sustain those tax cuts, and maintain social services. Then, to start paying it back, instead of doing it through taxation, we’ll sell off state assets. End result; we get the benefits, and Gen X, Y, etc, are left with $13 billion in student debt and not much more to show for it.

By the way, John Key and many others in his position had the benefit of a free tertiary education – fully tax-payer funded. With a student allowance on top, to make it all as easy as possible.

Then, through two tax cuts, he voted himself an extra $1000 a week.

Meanwhile, our young folk are accumulating more and more student debt. By last year, the student debt mountain has grown to an unfeasible $13.9 billion.

What a racket! This is ‘better’ than a Ponzi Scheme! It’s better than a Nigerian scam – because it’s all totally legal.

This is why our best and brightest young people are heading overseas.  They’re leaving before they get saddled with the bill for looking after us in our retirement.

Unfortunately, Labour’s policy to make sure disengaged youth are heard may be too little, too late. Our children are already disconnected from us and our society because we made damn sure it happened that way. Saddling our young folk with a debt we (Baby Boomers) never had to face is pretty well telling them, “Kid, you’re on your own!”.

All I’ll say to Gen Xers and Yers is: Run! (Though Baby Boomers – through the government – won’t let you get away quite so easily.)

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Additional reading

Student loans – the debt mountain

Govt may use student loan debt collectors abroad

Greed is Good?

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Politics through a crystal ball, palmistry, or chicken entrails?

2 September 2011 2 comments

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.

Furthermore,

“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.

 

Garrick Tremain cartoon, Otago Daily Times, circa 1998/99

 

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.

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Further Reading:

Molly Melhuish

New Zealand Electricity Authority

Energy and Resources (New Zealand Government, portfolio website)

Max Bradford

Contact Energy

Electricity sector in New Zealand

Don – stop smoking that ‘Kronic’!!

21 August 2011 1 comment
Don Brash, Leader of ACT Party

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.”

Really, Don?

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.

Sources:

Treasury 1

Treasury 2

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.