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

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Kidding. Already spend $26 mil out of the $100 mil.
I trust National Party financiers' ability to push any money making plan into action.
Dont forget that same bunch of financiers sucessfully made $$ out of thin air (CO2).
Remeber that??

Mighty River Management starting to smell bad no matter how much they pay them.


This is doubtless a catastrophe but not just for the Government. It is bad news for everyone in this little country and no one should derive any satisfaction from disruption to the asset sales programme caused by the collapse of Solid Energy.
It does show that owning assets is not a one way street for tax payers and that Governments are not much good at owning businesses , even when they are in a corporate structure. Pity this particular asset was not sold a couple of years ago so that  the budget did not have to take a half billion dollar hit in order  to recapitalise it. That money would have been useful for some thing else.
Air New Zealand is much better managed because it is already in mixed ownership and subject to market discipline but it could easily go the same way given vulnerability to traffic down turn and energy costs.

Yes absolutely, publicly listed companies never get into financial  trouble, never go bust. No. Not ever. Only government owned enterprises ever get into trouble dont you know.
Then there is the little matter of publicly listed companies (or privately held companies, you know who I am thinking of) that never get bailed out by the taxpayer anyway, no that never happens either does it?

I was thinking the same. Air NZ's last go at being fully private wasn't a huge success. Kiwirail and a range of others not too successful either. Or alternatively, consider those companies that have prospered under private ownership, but that with hindsight seem to have been sold for a song at  the bottom of the market.
Electricity demand looks soft for the next 2-3 years- especially if trading industries are hamstrung with a high dollar; but it's not hard to imagine scenarios where electricity, especially when largely renewable, is in high demand once again. 
If the government followed the lead of many other countries in funding its own balance sheet, then the immediate pressure for funds goes away.
English and Key seem determined not to consider such ideas though; so they are likely to paint the country into a dark corner one way or the other.

Feltex anyone?

..... if you'd plonked $ 10 000 into each of Feltex and Diligent , you'd now have a $ 50 000 " portfolio " ......

"dark corner" indeed, really though Labour offer nothing better.  The greens seem to have switched into the alliance over-night and have I suspect taken the left vote off labour in the process, yet are just as clueless of where their variety of pork barrel politics will be funded from as everyone else.  It would seem the middle income PAYE is going to bled some more come 2014.
Sadly I think I'll be voting National.  I think they are the ones most likely to do the least damage, what a wierd thought....maybe I just wont bother voting, none are fit to vote for.

We have to remember two things:
That energy underwrites money (so an energy company, beyond the point where growth could be energy-backed, is in trouble. The artificial 'valuation' (money) no longer rates as a measure. That's what got Don Elder - a reasonable intellect by my reconing - into trouble. Forgot to stand back one more pace, forgot to divest the cranial 'givens', assumed and accepted.
And that even then, the REAL costs weren't being paid. C02 was being dodged and denied, depletion was being denied and the warners thereof being derided. How much Solid Energy money went to funding Baker's bunch? Taxpayer wealth being used to brainwash the taxpayer.

I'm intrigued at your point re Solid Energy, which presumably hasn't got into trouble because of peak coal; rather the opposite, there is a bit too much of the black stuff around for current sluggish demand, so prices are very soft. (My understanding is they have dropped the ball on some other alternative stuff, maybe not planned for anticipatable low price scenarios, and got into too much debt.- paying a hefty dividend in the circumstances wasn't too sharp).
Allowing for some softness just may be China's newfound preference to be able to breathe their air without filters over their faces, otherwise the price softness seems to indicate the opposite of peak coal- and therefore energy. 
That same softness just maybe hurts our power companies in the same way. If others can make cheap aluminium for example using coal; then renewables here get hurt. I do suspect there will be a turnaround in the next few years back towards renewables, but for now, peak energy looks a little way off.
I do respect though that you have studied the subject far more closely than me.

Stephen, 1st para, an abysmal analysis IMHO.  It and iron ore are all following the supply demand curve that peak production  theory says will happen, ie stagnant increase in supply causes record prices. What peak anything does not dictate is the collapse in demand from a recession leaving the cost of production above that of what they can get, hence this mess.  So we''ll see ever more similar scenerios played out...the shale gas play is looking that way....the shale oil play will I think never get that bad....
Coal's price dip will be like oil's price dip by dec08, and then climb out...just rinse and repeat, so no switching aliminium production to coal makes no sense, even if you ignore AGW.
Then of course many ppl from the bottom, like notaneconomist to the very top our "thinking" ppl like beloved JK think that throwing more money at the problem via the free market will solve all. So why be surprised that the CEOs and boards didnt see it coming when the economic model they believe in is/was so flawed...
We do talk about peak oil mainly, however peak energy is mostly made up of fossil fuels. So yes peak energy as you refer to it is about now, maybe a decade off I dont think 20 myself. An eye blink in time really...whats the mean time of a mortgage? NB also that mean is based on 25 years as the norm in the past. 30 years now seems the new norm....so debt has longer and longer periods where the opportunity of paying back of it ever shorter, I suspect it doesnt add up in a very big way.

From a climate change perspective, it would be fine by me if we were close to running low on coal, but the facts appear to get in the way.
This link suggests there is 112 years of known reserves, at current rates of production, and they haven't even really tried hard to find the stuff yet.
Nor do I advocate switching aluminimum production from renewable to coal power stations. But the decision's not mine. Tiwai Point is apparently under some risk of closure. This article is about selling government assets, primarily the power companies. Close Tiwai, and their short term business model doesn't look flash.
However I would prefer we took a longer term view; but that would require the government to have longer term options on financing that did not have us up to our eyeballs in foreign debt. It is this point where I believe we have options, and the Greens at least are open to them.
Separately in a different post you rightly question the Greens' and Labour's discipline on spending, and on this, I actually agree they need to articulate way before an election how they will not blow out government expenditure; and to be clear that any tax plans are not an economic own goal.

Well put Mist.
My real concern is that Solid Energy were following government policy.
The same government policy that is driving a number of irrigation schemes that will provide negative returns.
Borrow more, spend more, produce more, and without returns you go bankrupt. 
Joyce and Key - drivers of current government policy - are working on a philosophy of believe, borrow, spend and hope.
Solid Energy will be just the first of many such failures.

Surely the plan of choice, so our overseas masters can gain control @ pennies in the dollar - meanwhile the stupid subservient voters carry the ownership conversion/pillaging costs - cries of treason should be ringing out around the country if the citizenry had the sense to perceive reality.

All that talk of treason and I found this - Why oh Why would her Majesty be visiting Rome in March?

The British Monarchy has a penchant for threatening to turn Catholic when presented with impediments to it's perceived but nonetheless taxpayer funded rights. So I suppose a visit of overt support for this ailing religion maybe necessary to maintain the efficacy of any future threats.

Simply, too slow...btw the worthless asset is Air New Zealand.  SE has a future because it has/had an energy resource the only Q is now should it be allowed to fail as a firesale or be propped up.  I dont myself see the value in propping it up, it was badly managed by incompetants, so let it go out of business and let the bankers take it on the chin.

Behave yourself ! ..... Air NZ has been very well run ...... but it is a low value service , with massive capital expenditures and with high commodity costs ...
.... it's a tribute to Rob Fyfe that he kept them from bankrupting the tax-payer a second time 'round ....... or is it the third time , when they next go belly up ? 

Focus, chaps and chapesses.  Thread itself is living up ter the heading.
Point is that without the $ from at least some of these partial ownership shuffles, the GumNut is gonna haveta go looking in some other trouser pockets to see if there was the odd $20m note it left.
Because the point of the sales was to convert some capital into other capital in health, education and other Worthy Things, IIRC. Or so the spin went.
But absent the sales, where are them trouser pockets?

  • Jane and Jo Taxpayer - more Gumnut fees and charges, removal of allowances, imposition of new stealth taxes (carparks, anyone?)
  • The capacious arms of Furren Lenders, at a very reasonable rate.  For now.  And until they too have a trouser moment and want it all back.
  • Gumnut payrolls headcount reductions.  Ain't gonna happen anytime soon, 'cos Gumnuts need lotsa Dependents to keep voting for the Hand Wot Feeds.
  • Pensioners and other Beneficiaries.  These ungrateful lot sit around, Consuming and Demanding More, and not contributing one leetle bit to Wealth Creation.  Cut their ...Oh, but they're Dependents.  Whoops, see above, fer Gawd's sake take 'em off the list, Bill.  Sheesh, that were a close one...
  • Resources!  Why bother having SOE's try ter manage the things and inevitably foobar the job?  Just tender 'em off already.     Why, Billy, Ah do b'lieve we have a Live one here....wonder how much Gold and Silver our fair citoyen have squirrelled away, too?  Take a note, Milly - if'n forgetful folk can leave Jars fulla Euros in the RedZones, why there could be legs on this one too.

Oh dear.  I've slipped into Parody Mode.  Time for a spa and a read of the Saturday Dead Tree edition.  Byeeee.

  • The capacious arms of Furren Lenders, at a very reasonable rate.  For now.  And until they too have a trouser moment and want it all back.
  • Gumnut payrolls headcount reductions.  Ain't gonna happen anytime soon, 'cos Gumnuts need lotsa Dependents to keep voting for the Hand Wot Feeds.

Waymad, you are on top form today. Lovely stuff.