Opinion: The Government has stepped in on the Tiwai Point smelter power negotiations. Why is this not reassuring?

Opinion: The Government has stepped in on the Tiwai Point smelter power negotiations. Why is this not reassuring?

By David Hargreaves

Were you reassured by the news that the Government has now stepped in to attempt a deal regarding power supply to the Tiwai Point aluminium smelter?

This observer has to say that he was not.

Nor was it particularly soothing to see SOE Minister Tony Ryall describe the Government's actions in approaching mining giant Rio Tinto directly as "helping to bridge the gap" between the Rio subsidiary that controls the smelter and Meridian Energy, the SOE that is contracted to supply power to the smelter.

"Bridging the gap" sounds suspiciously like a euphemism for 'offering incentives'.

The smelter chews through around 15% of all the power produced in this country. If the smelter were to be closed - as is the not-so-subtle threat - then suddenly we have a serious over-supply. An over-supply of course should result in rather drastic power price reductions. Good news for the consumers then.

But not good news for the Government.

It is heavily committed to its partial (up to 49%) sale of state assets. The Government's looking for between NZ$5 billion and NZ$7 billion for selling down its interests in Meridian, Genesis Energy, Air New Zealand and Mighty River Power.

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.

Basket case

Solid Energy has already been withdrawn from the original list of five sell-off candidates due to being officially declared a financial basket case.

But Mighty River Power is at the starting gate and ready to go. Already 440,000 Kiwis have pre-registered interest in buying shares. It has been speculated that perhaps NZ$1.9 billion could be raised from this float. So, it is important.

Now, MRP does not supply Tiwai Point but of course it would be affected in terms of the prices it gets for power down the track if the aluminium smelter was taken off line and suddenly 15% of the country's power doesn't have a user.

The Government would have to be worried about what the difficulties over Tiwai Point might do both to demand for the MRP shares and, crucially, their price after listing on the NZX. A poor post float price would make it much harder to sell the other assets.

Commited to sell-down

But remember too, the Government is committed to selling down Meridian itself and that is the real biggie of the power companies. Based on last year's company valuation of nearly NZ$6.6 billion, a sale of nearly half of Meridian could be expected to fetch over NZ$3.2 billion - so, it is vital that the value of Meridian is preserved. And what would loss of the smelter contract do to the company's value?

So, it is fair to say the Government is fairly heavily incentivised to ensure that some sort of deal is cut with Rio to ensure that the smelter stays open in the foreseeable future - till after the power company assets are flogged. And it is that 'some sort of deal' concept that bothers this observer.

We know already that this Government is unhealthily willing to go behind closed doors and negotiate one-off deals with big corporates. Think SkyCity Entertainment and the convention centre.

So, what are we to expect now that Rio has been directly approached by the Government to "bridge the gap" on the stalled contract negotiations between Rio's subsidiary and Meridian.

Relevant information

SOE Minister Ryall promised that "all relevant information – including about the smelter electricity contract" – will be in the Mighty River Power offer document currently being finalised.

Good. You would expect nothing less.

But where is the Government's explicit commitment to reveal the terms - all of them - of any deal it strikes with Rio or assists Meridian to strike?

Rio will know it currently has the Government on toast over the smelter. So, on one side we have a desperate government that has already shown this unhealthy willingness to cut one-off deals with corporates and on the other side a very big corporate that knows it has all the leverage.

It would be not hard to envisage a situation where a very sweet deal is arrived at for Rio in order to ensure that the smelter lives on for now and the Government can succeed with its asset sales programme.

At what cost?

But potentially, a deal could be a very long-term one and potentially at what cost to the country?

The Government needs to explicitly promise that any deal/compromise it reaches with Rio will be fully publicly disclosed. It needs to make that promise now.

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

23 Comments

Comment Filter

Highlight new comments in the last hr(s).

The Government needs to explicitly promise that any deal/compromise it reaches with Rio will be fully publicly disclosed. It needs to make that promise now.
 
So what if the government discloses a sweetheart discount price deal for Rio Tinto, the majority of citizens still get to pay more to keep warm, without the offsetting dividend income. 

Especially the poor and OAPs as high[er] power prices are a regressive tax Yeah great those on limitied incomes in particular get to offer support to a mega corporate whose holding a gun to the Govn's head.
 
makes so much sense, honest...
 
 
 

Hmm. Every business in New Zealand who is not a supplier to Tiwai would also benefit significantly from Tiwai closing. I like Tiwai but closing it could be a case of one step back and five steps forward. A hard decision to make though.

Cunning. Smooth. Clever timing ..
The government has it's hands full selling MRP. Can't have the wholesale price of power dropping like a stone 1 month out from the MRP IPO. RIO waits for the most opportunistic moment to screw the Government and John Key. But then why not. Who wouldn't. That's what happens when you play with the big boys. RIO will be saying to John Key. We are willing to pay $0.03 cents per kw/h. Ten year agreement. Take it or leave it. Offer is good for 10 days, after which we walk away, and announce to the stock exchange the cancellation of the contract. Watch the price of electricity go down as 15% of additional generating capacity hits the market.
 
Little Johnson has to hold the market up.

Why is it John Key never acquaints himself with real world financial reality ahead of time? It's always ambulances at the bottom of the cliff with his government.
 
This bozo and his team of financial misfits have worn my patience beyond ragged.

SH - Iconoclast is right - clever timing.
 
Announce that we about to be shafted, and by those already shafting us, as we pack up to head away for Easter?
 
Yeah right. (needs altered punctuation).

So what is the best way not to be shafted? It certainly is not to be panicked into a firesale. The sales in any case should stop- and should never have started- at least until a fully transparent deal with Rio is done; if in fact it is, such that we can see a) whether the deal was a good one for NZ compared to options; and what is the impact on the power companies to be sold, on electricity prices and so on. 
The bollocks about needing these sales to fund schools and hospitals etc was always rubbish. Stop the sales, at the very least until the outcome is clear.
If it isn't clear, I agree with all three of you above; although you may of course not agree with me.

Yet Labour would be no better...all Govns are this bad IMHO, just look at the US states where such games are common....even Ireland with its 15% corp tax....
and the freemarket is sooo great and efficient.....yeah right.
Interestingly of course JK should be mates with the CEOs/boards and here he is being shafted by them.
regards

Little Johnson has to hold the market up.
 
Yep. And house prices.
 
Otherwise our costs might stabilize or even come down - and that is not in Johnson's orders.

Depends on the profit the smelter is making....its a game of bluff...
oops.......
Of course what's the voting %s down there? loose smelter and the area goes down the tube.
regards

RIO has a 15 year agreement with the Victorian State government which expires next year at $0.03 cents per kw/h. Currently threatening to shut down both smelters.

Isnt it losing money on those anyway?
regards

Don't we have a 30 year deal signed and sealed. Thought JK was a hardball money dealer?
this what happens when you subsidise industry, sooner or later it's gotta stop.

Meanwhile over in Mongolia
Mongolian govt eyeing $300m in Rio royalties: The Mongolian government will look to recoup $303 million in royalties from miner Rio Tinto Ltd this year, amid an escalating standoff threatening to delay development of the Oyu Tolgoi mine.

Has a cost benefit been produced, over giving them cheap power. Generation is very expensive, so having an over supply may not be such a bad thing for NZ, as it would reduce the need to invest future money into new generation.

Excellent article. The difference between journalism and reporting.
i agree with many of the comments posted, particularly enlighteded by the above via Sore loser. You should run for office.
The problem being as JK and BE are determined to sell NZ down the river (no pun intended) by a subtle approach of destroying most of our SOE's from within leading to the enivatble conclusion: "they would be better managed in private hands"... 
If only more  Kiwis actually recognised what is happening in their own back yard and reading articles from this website would we see further protest at the way this govt are handling OUR assets.
Sadly, most people I know have never heard of interest.co.nz and therefore have little opinion on the matter or say things like "it doesn't affect me!!"....sigh.
 

The Zealand Herald's Fran O'Sullivan brings SOE corporate misgovernance into focus:
 
This set of elected gangsters are indifferent to protocol.
 
Key probably finds it hard to compute that his Government is now on the backfoot as it tries to scramble together a short-term subsidy to prop up the energy-hungry smelter for a few more years, all the while as the Treasury floats down 49 per cent of the shares in Meridian Energy (which supplies electricity to the smelter), and other state-owned electricity generators like Mighty River Power and Genesis Energy.

 

The problem is Key's Cabinet ministers - particularly State-Owned Enterprises Minister Tony Ryall - have become so captive to the Budget forecasts which Finance Minister Bill English wants to make good on when he unveils the next major numbers in Parliament on May 16, that they are prepared to sacrifice the integrity of the State-Owned Enterprises model for short-term gain.
 
Cabinet ministers are not supposed to bypass an SOE board when it comes to negotiations between the company and its customers.
 
Yet Ryall - without even a blush - has done just that.
 
This is a questionable tactic at best. And (in some quarters) would be viewed as bordering on outright market manipulation. A major shareholder who pulled such a stunt in the commercial sector would be seen as operating a very dubious support mechanism to artificially hold up the price of major revenue streams to enable that very same shareholder to realise artificially high gains when it comes to floating down comparable assets.
 
It should be investigated by market authorities.

Gee. Must be more going on behind the scenes than I'd have thought... "swinging dick to limp dick" - surprised that got by the editor. Won't go over well with the executive, but then Key has really degraded the office of PM in terms of media engagement - preferring to do the gangnam with the local breakfast fraternity. Unsurprising given his appalling performance on BBCs Hardtalk.  Indeed as Fran suggests he's comfortable at being a dick - and the only place he can swing it successfully these days is on a comedic stage.

Forget about this little fraud....have gork at some real thieving...lashings of madness and a dose of pure evil.....http://www.marketoracle.co.uk/Article39676.html

Sore Loser,
I like your thinking. It only makes sense when you think about it.
1. Make no deal. Let Rio close the smelter Rio is currently playing the same game in France and the French have told them to get lost.
2. Buy the smelter from Rio for a song
3. Meridian supplies power to smelter at a good price and NZ inc start selling aluminium to the world.
4.Demand for aluminium is currently low but it will not be low for long. As vehicles become lighter to become more energy efficient it will soon dawn on someone that plastic derived from oil is going to become scarce once oil starts to runout.The next best material would be a lightweight easily recycled material that dose not rust like aluminium.
5.NZ superfund already own a Refinery so why not a smelter?
6. The key point here is that without power the smelter cannot run. Rio doesn't own the power plant. They need a muppet government,desperate to do any deal at any price and take the profit.                                                                                                                                                            
NZ government needs to step back and stop dropping it's pants for anyone with a cheque book.

My first thought when I heard the news was, "it's the hypocrisy, stupid!" And if the smelter closed down, the local mayor Tim Shadbolt would turn against the Govt.
 
The usual suspects are lecturing to us that the cupboard's bare, yet there's still a magic pot of gold for the mates at the country club, Warners execs, casino execs, IRB execs, and now mining multinationals.
 
Frank Macskasy of The Daily Blog has just lodged a Commerce Commission complaint on the whole matter. Interesting to see what happens if it's upheld.

Deepred - just remember that Tiwai was Hugh Watt's proudest achievement.
 
We've been subsidising it from day one.
 
From a national perspective, it's better gone.

"local mayor Tim Shadbolt would turn against the Govt"...and there's me thinking Tim would turn against god!