Opinion: Could the Solid Energy struggles signal the beginning of the end for the Government's vaunted partial privatisation plan?

By David Hargreaves

The creaking noise you can hear is coming from the National Government's partial asset sales band wagon, or "mixed ownership model" as the government likes to style the policy.

Beleaguered state coal miner Solid Energy has of course already previously been removed - for the immediate future - from the list of candidates for partial sale. But the news that it is having the dreaded "discussions with its bankers" has further dimmed the outlook for the increasingly troubled asset sales programme.

The Government is continuing to bluster that all is well with the programme. But what if the Supreme Court ruling, due by the end of this month on the Maori water rights claim in respect of the proposed Mighty River Power (MRP) float, goes against the Government? The people in the Beehive have adopted a high-risk strategy by steaming ahead with this proposed float in the face of the opposition from Maori.

Line call court ruling

To this observer the final decision from the court looks to be a line call. But even if the call goes in the government's favour, the momentum of the programme has been slowed at the wrong moment and the prospects for it tarnished. The delays in timing - bearing in mind that the MRP float has already been delayed six months - might be absolutely crucial.

The New Zealand sharemarket, as measured by the key NZX 50 Index, climbed a stunning 24% last year. An MRP float would have gone gangbusters.

While the sharemarket began strongly in January, in the past few weeks it has started to pull back from the highs, and just maybe the environment for a market listing is not going to be as good this year.

Obviously, there is strong investor demand for new share issues of quality (which MRP most definitely would be), with interest rates still at extremely low levels and investors searching for higher yields. But the difference between selling MRP into a flat market versus the rampant, rising market of last year could make for hundreds of millions of dollars less in the government coffers.

Crucially also, if the overall market is not so good, then the share price of MRP post-listing might struggle - and this would have a knock-on effect in terms of the enthusiasm of the private investor to get involved in further state asset floats. The "mixed ownership model" strategy, a significant election issue in 2011, looks on shaky ground.

The famous five

To go back to the beginning, the list of privatisation candidates was originally five when the government confirmed the plan in 2011 to sell up to 49% of the businesses.

Included on the list at that time were: Solid Energy, Mighty River Power, Meridian Energy, Genesis Energy and Air New Zealand. The latter of course is already listed on NZX, with the government owning 74% of it and planning to sell down to as far as 51%.

In 2011 the government, which has been borrowing in the vicinity of NZ$300 million a week, said the proceeds from the sales were earmarked to go towards NZ$33 billion of net new assets over the following five years. This would include new schools, operating theatres, ultra-fast broadband and transport infrastructure.

Prime Minister John Key was reported as saying the asset sales could free up as much as $10 billion. This always looked a very rosy coloured view. A more commonly assessed figure would have been around NZ$7 billion.

Such reasoning took in mid-point independent valuations of NZ$1.7 billion for Solid Energy (oh, really?), $6.4 billion for Meridian, $3.75 billion for Mighty River and $1.65 billion for Genesis. Work out 49% of the sum of those figures and add in circa NZ$300 million for Air New Zealand shares and you get a shade under that $7 billion.

Except that's not what the government would now be getting. Already around $830 million of that figure is gone with the removal from the scene of Solid Energy. Until presumably quite recently the government will have hoped it could still put Solid Energy on the block at some point. The business won't be allowed to fail. But some sort of serious bail out will be required, which could take time.

How much?

And how much will it cost? Presumably any recapitalisation of Solid Energy will take hundreds of millions of dollars. So, that's money going into a state asset, rather than being derived from it through a partial sale.

Even if a bailout is successfully achieved it will now take Solid Energy some years of achieving credible financial results before its reputation is restored to the point at which any sale could be even remotely considered. So, we can rule that out, meaning that already a hole of approaching NZ$1 billion (and possibly more depending on the cost of a bailout) has appeared in the plans for funding new assets.

And now if the worst comes to the worst with the Supreme Court ruling, where would the government go? Further substantial delays in the potential sell-offs are going to put pressure on the budget forecasts.  The government has a target of a return to surplus by 2014-15. What happens to that if the government can't raise anything like the imagined NZ$7 billion in the next five years? And what happens to that NZ$33 billion of new assets?

Does the government borrow more? Or does it cut back on some of the planned spending? If it borrows more then the international credit ratings agencies might take a pretty dim view. And what would happen to the currently very high Kiwi dollar?

On the other hand, cut back on the investment plans and that would have a dampening effect on the overall economy.

All is not well in the world of the mixed ownership model. And it could be about to get worse.