Opinion: The Government should get the Mighty River Power float out of the way and then halt asset sales till after the next election

Opinion: The Government should get the Mighty River Power float out of the way and then halt asset sales till after the next election

By David Hargreaves

I was surrounded by business people. They were not happy. They were angry.

This policy I was assured, will ruin New Zealand. We will have no friends. Foreign investment will dry up. Disaster. We will stand alone.

Economists with a good grasp on history might be able to quantify just how much economic damage New Zealand's move to an anti-nuclear policy in 1984 actually did. (Well, what did you think I was talking about?) I reckon I would be correct in saying that New Zealand didn't quite experience the economic Armageddon those agitated business people who bent my ears backwards all those years ago suggested - nay insisted - that we would.

The point I am attempting to make here is that every time the political status quo is either changed or challenged then parties with vested interests start coming out with all sorts of dire prognostications. If foreign investment were to really dry up all the times business folk warned it would there would have been no foreign money at all in NZ in the last at least 30 years. But funnily enough, it has kept coming.

The initial extreme hysterical reaction from what can only be described as "the top end of town" (for this read "monied") to the Labour/Greens policy for a single power buyer has been so over the top as to risk becoming counter-productive.

Let's be honest, the financiers, brokers and wealth managers have been salivating at the prospect of partial privatisations of state assets for years, since the idea was first seriously mooted about the mid-2000s when we had a Labour-led Government that was intent on never selling anything. A change in Government to the privatisation-friendly National Party was needed for the private sector fantasies to be fulfilled.

The partial privatisations have seen a corporate feeding frenzy the likes of which NZ has not seen in years. Let's be blunt. Some people stand to make a lot of money out of this.

Throwing the toys

So, peering between the lines of some of the invective pouring forth on top of the Labour/Greens policy it has been possible to glimpse images of toys being thrown vigorously out of cots. "I want my privatisation! I want my privatisation!"

Following all this, it has become obvious that at least some people have realised within the past 24 hours that all this rabid scaremongering was probably not doing the Mighty River Power float any good.

Now, suddenly today, we have the Prime Minister, Finance Minister and some in the marketplace taking the “it’ll never happen” line. Yes, maybe Labour and the Greens will get elected but ooh, the chances of that funny plan they’ve got being brought in within the next five years or so are slight.

So, in other words buy MRP now and you’ll be okay for a good few years. Go ahead. Fill your boots.

Whether the damage has been done to the MRP float, we shall have to see.

I think some damage has been done, mostly because of the Government’s intemperate and unwise initial response to the Labour/Greens plan.

Reds under the bed

The response of the Government was genuinely surprising and showed that it had been clearly wrong-footed by what was a cynical political masterstroke. The sight of today’s politicians summoning up communist scare tactics that revisited the “reds under the bed” rubbish so beloved by National in the 1970s and 1980s was particularly unedifying.

If the Government had pulled out the “it’ll never happen” response first then investors might have been less likely to be put off.

I reckon the good news for the Government is that it will still be able to claim victory because the shares will be sold within the NZ$2.35-$2.80 range.

Less obvious might be the fact that just maybe without all these distractions the Government might have been able to get these shares away at NZ$3-$3.10. Remember the indicative price range is just that; indicative. In fact when National sold Contact Energy in 1999 it did indeed get the shares for mums and dads away slightly above the offer range at NZ$3.10 a share.

If the MRP shares were now to sell for say NZ$2.60 that would raise the Government NZ$1.78 billion, which looks okay.

But a sale at NZ$3 would raise NZ$2.06 billion – a difference of around NZ$280 million. And you could do quite a bit with NZ$280 million.

Selling it cheap?

The risk is that MRP is now going to be sold on the cheap side – if you assume the Labour/Green plan would never happen.

Frankly, the minute it began to look as though some possible harm had been done to the MRP share price – and I contend it has – the Government should have pulled the plug. Yes, halt the asset sales programme and then treat the power sector and the partial-privatisation policy as a kind of election-time referendum.

But of course the Government is so dogmatically committed to achieving the partial-privatisation that it was never going to do that.

However, it really should consider what it does next.

While I offer no view on the merits of MRP as an investment, I do happen to think it is the best of the SOE power companies. MRP is mostly in renewable energy with a nice mix of hydro and geothermal power. In contrast Genesis Energy still has substantial thermal assists that represent a kind of "work-through" issue for its future, while Meridian Energy (much the biggest of the lot) has the small problem of being the supplier of energy to the will-it-close-or-won't-it Tiwai Point aluminium smelter.

The point is that perhaps the returns from the MRP sale might not end up being as good as they could have - though the Government's unlikely to ever admit that. That's one possible problem.

The other potential difficulty is that all the fuss around the Labour/Greens issue just might mean that the MRP share price once the stock is listed on the sharemarket is not as good as it would have been either.

Under such circumstances you really have to wonder how the next two asset sales would go. Is it worth the risk?

Surplus talk

The Government's now saying that it is not dependent on asset sales to make its projected surplus in 2014/15, as the money released from the sales will be used for capital to buy other assets and is not part of operational funds.

Yes, okay. But if the Government doesn't get the NZ$5 billion to NZ$7 billion from the asset sales that is targeting to buy new assets with, how does it buy the new assets? Does it borrow the money instead? In which case there goes the surplus after all. Or alternatively, does it not buy those assets or simply cut spending somewhere else so that it can still buy them?

The Government seems to have dangerously locked itself in to one course of action and fears stepping back because it thinks it would lose face.

The rational way out of this would be to, okay, go ahead with the MRP sale. But then, let's have a stop and a think, shall we?

Personally I would forgive the Government if it halted the asset sales programme after MRP till the next election. Then the Labour/Greens plan can be put before and judged by the electorate. If it really is as nutty as National are saying, then Labour and the Greens won't win, will they?

If National held power again after 2014 it could confidently go ahead and sell the rest of the assets. This would seem a rational thing to do.

But of course, National would have the problem in the next year-and-a-half of what to do about the 2014/15 budget projections. Declare the surplus dead? Don't buy the new assets it said it would? Cut spending somewhere else?

Maybe, given the corner it has painted itself into, the Government's next step will be an early election, either late this year or early next.

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20 Comments

The National government's talk of Communism and North Korea over electricity did rather remind me of National's Dancing Cosacks of yesteryear where Superanuation = COMMUNISM.
http://youtu.be/IbevFguT6NE

Good piece.
 
Oh what a tangled web, etc etc. Pidgies coming home, all those come to mind.
 
Arogance and ignorance are such jolly bedfellows, what?

Is this a financial news website, or a left-wing political blog?

I can assure you that is the first time I've ever been accused of being LEFT wing!

I used to love this site for its financial news and reporting, but I feel as though too much content these days is political in nature (rants against banks, the govt, the system in general). There's an OCR decision tomorrow and you would barely know it looking at the site today! Just my opinion.

Opinion most welcome. This is the OCR piece we ran over the weekend.

And we also ran this one today from Roger J Kerr on the OCR - http://www.interest.co.nz/opinion/64120/roger-j-kerr-says-governor-wheel...

Why don't you ask Milford Asset Management Limted the same question.
Is Milford Asset Management Limited a Fund Manager or a Blog?
Just asking because they allow thier Portfolio Manger, Mr Mark Warminger to wax lyrical on thier site about "Rolling Blackouts" and then claim The views expressed are not necessarily those of Milford Asset Management Ltd.
 

Yep Johnson.  JBWere, Milford et al have been left to run amok with their left wing views.  Promoting a system that subsidises shareholders with super profits.  A protected interests system almost at the level of a command economy.  They are challenging any attempt to move to a market competitive system.
Yep Johnson.  It's a financial new website.  And in the age of modern journalism.  You now get the expertise of all of us contributors.
 

Promoting a system that subsidises shareholders with super profits.  A protected interests system almost at the level of a command economy.  They are challenging any attempt to move to a market competitive system.
 
A similar juggernaut operates in the US
 
Today, in the US, almost nine out of 10 mortgages issued in the US are subsidised by the state through a bewildering array of state-sponsored groups. They include Freddie Mac, the Department of Veterans’ Affairs, the 12 Federal Home Loan Banks and Fannie itself. Housing, in other words, has become an arm of the state.
 
One of these groups, the Federal Housing Administration, is so integral to the market that without it prices could have fallen a further 25 per cent, according to Moody’s Analytics.
 
And at the same time the Federal Reserve is soaking up some $40bn of mortgage debt a month – through “quantitative easing” – with more than one eye on the housing market.
 
It is hard to dispute that if you own a residential property in any of the 50 states its value is being held up by the whim of politicians and central bankers.

David,
Yet another very good article; have certainly enjoyed your contributions to the site.
It will be interesting to see whether the Nats do indeed pause. They most certainly should for all the reasons you mention. As well, it would seem like political suicide to sell another SOE power company within a year before the next election, if my reading of the voters' collective tea leaves is correct. My understanding is that the latest polls, which would already have Labour, Greens, NZ First in power if an election were held now; were done before the Labour Greens power proposal was announced.
And the reason in my view that this site may seem like a left wing blog site to Mr Johnson above, is that frankly the arguments supporting the Labour Greens position have been far more soundly put. (For the most part because the facts of very high power prices get in the way of National's view, and their supporters struggle to get past that problem). The best the Nats can hope for is that MRP will be somehow forgotten by November next year, although if they are still trying to flog other assets off afterwards, that would still seem a vote loser.
So they just might have a view they have no chance then anyway, and sell everything while they can.

Headless chickens abound in our financial elite, methinks.
Why don't they try getting a few of their own ideas off the ground instead of relying on the gummint for their social welfare commissions?

Good piece.

Pertinent words from George Monbiot. Neo liberalism is a self serving cult without any mathematical legitimacy or basis in human psychology apart from greed and self interest.
http://www.guardian.co.uk/commentisfree/2013/apr/22/faith-markets-misplaced-governments-save-planet
"But the interchangeable middle managers who call themselves ministers cannot wholly dismiss the wishes of the electorate. They must show that they are doing something to protect what people value. They resolve the contradiction between the demands of the electorate and the demands of big business by shifting their responsibilities to something they call "the market". This term is often used as a euphemism for corporations and the very rich.
 
To justify the policy of marketisation, they invest the market with magical capabilities. It can reach the parts that the ordinary scope of government can't reach; it can achieve political miracles. I don't believe that market mechanisms are always wrong. I do believe that they fail to solve the problem of power. In fact they tend to compound it....
 
When governments pretend they no longer need to govern, when they pretend that a world regulated by bankers, corporations and the profit motive is a better world than one regulated by voters and their representatives, nothing is safe. All systems of government are flawed. But few are as flawed as those controlled by private money."
 
 
 
 

Well said Stephen.
I'm curious to read your response to this scenario (or anyones for that matter) :
MRP float goes ahead. Mums and dads buy up half the share float available at $2.30 per share. Assuming many have been scared off by recent political unrest!
Does the govt then change their tune and sell the remaining share float to overseas investors?
Obviously peeving off many folk in the process but reaching their target goal of $2bn+ 
Firstly, can they?
Secondly, would they?
Political suicide one might think but then again... more in the coffers for Bill, Tony and john to play around with..

dobrydan,
As is often the case it seems, there are too many Stephens on the site, so am not sure which one you directed the question to.
Selling them directly to foreign investors- even though that is the inevitable destination for most of the shares- would seem the least politically acceptable solution, so I would be surprised if even the Nats would try and pull that off.
The supposed necessity of the sales starts with Bill English's blinkered view that NZ based financing of the government deficit or required capital spending is not possible, even though virtually all other major countries are financing their spending requirements internally. Our external financing is the cause of our over valued exchange rate; such that these power company sales have a double whammy on the economy; lost profits and employment to exporters, import substituters etc, as well as the lost dividends over time. That's without even starting with the high electricity price problem the current pricing process delivers.
It was nevertheless no shock at all to see the following article appear in today's Herald, suggesting that the current market will in fact magically now start to deliver price reductions:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10879487
Have worked in corporates enough to know that when a lot of noise is made about pricing, that token efforts are made for a while until the noise dies down. Given all the managers and directors of these companies no doubt would like the ridiculous salaries that seem to go with selling 49% of them, expect some token price reductions through the next election. That will likely be the Nats election hope and position on the matter. I would have thought voters will see through it, but time will tell.
 

Fund managers (with vested interests), risk losing their credibility (and customers) with unnecessary scare mongering. What do these people actually know about the electricity industry?

An EBITDAF return on capital of 15% over the same period does not seem
unreasonable to us (NZ$8-9bn has been invested in NZ electricity since 2000).
- our point exactly
http://media.nzherald.co.nz/webcontent/document/pdf/201317/PowerLatest.pdf
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1087...
We estimate that, net of line charges and after allowing for inflation, residential electricity prices have risen 2.6% since 2000. - so much for tracking CPI.
 
- we still suggest alteration to wholesale market rules and teeth for the regulator (but the regulator can only rule on the book in front of him).
 

Brilliant post David. I agree with you, the plug should have been pulled!
But that would have been a  decision that requiered a robust back bone... And, it would not surprise me that the SOE sales were the main motivator for his international support, and some of his local support too.
HGW
 

 
Frankly, the minute it began to look as though some possible harm had been done to the MRP share price – and I contend it has – the Government should have pulled the plug. Yes, halt the asset sales programme and then treat the power sector and the partial-privatisation policy as a kind of election-time referendum.
But of course the Government is so dogmatically committed to achieving the partial-privatisation that it was never going to do that.
Could not agree more with your overview of it David H....as I was saying the other day it was indeed something of the magnitude to consider a snap election and reconfirm mandate to proceed.
 Now by the very fact (it appears) that was not considered leaves you to draw your own conclusiuons.... they ( the Nats) consider the probability of losing.
While the revisiting of Reds in the Bed...A Mouse in the House...of the 1970's/80's is a desperate tactic by the Nats, the difference is Muldoon would have called or at least threatened a snap election to throw some chaos into the other parties need to organise and prepare adequately.....so, there...is ...a difference, in that either, the arrogance of the privatisation push by National is so entrenched with smug indifference to opinion it will proceed in confident abandon...........or , an announcement of magnitude will be on the horizon post any float failure, look to the next two months for lots of feelgood news coming out of the Govt and just bet they are readying to go early. 
 a very thoughtful piece BTW....really good!!