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Opinion: Only time can truly measure the success or otherwise of the 'mixed ownership model' but this observer reckons history will judge the policy harshly

Opinion: Only time can truly measure the success or otherwise of the 'mixed ownership model' but this observer reckons history will judge the policy harshly

Let me start by laying my cards on the table.

I was a staunch supporter of the sale of state assets in the 1980s and 1990s. I therefore have no "philosophical" problem at all with the concept of moving assets from public to private ownership.

I stated in print back in 2007 when the idea of what is now the 'mixed ownership model' was being promoted that I didn't agree with it. And I stated further in a column back at the start of 2011 (apologies I couldn't find it online to link to) that I didn't agree with the National's partial privatisation policy as was then being developed.

The problem was not philosophical - and I don't think a decision like asset sales should be philosophical, though this policy clearly has true-blue National dogma at its heart. My problem was I didn't think it would be worth it, in strict dollars and cents terms.

Not worth it

And I came to that conclusion when I was thinking that the Government might be able to flog off 49% of Mighty River Power for about $2 billion and a further 49% of Meridian Energy for around $3 billion.

So, no, a combined total of $5 billion for sale of shares in those companies I didn't think was worth it.

Therefore, no congratulations will be handed out from my direction for the Government managing to scrape in around $3.58 billion for the two.

Now, I know the Government's treating the proceeds as a capital item, which will be redirected into new state assets.

But just for some relativity, consider this. Core Crown spending in the past financial year was $70.3 billion, or around $1.35 billion a week. So, the amount the Government will be taking in for MRP and Meridian (bearing in mind it won't get a third of the Meridian money for 18 months) would have kept the state machine going for a little over two-and-a-half weeks if applied operationally (which, yes, it is not going to be). But it gives some perspective doesn't it?

Tiny amount

A tiny dollop of money.

But for such a tiny amount the Government has now given up nearly half control of two enormous assets.

And so, yes, the cheerleaders will come in, the Government still has control. But my argument has always been that 51% control is a slippery slope. It gives little flexibility. Neither Meridian nor Mighty River would be able to simply go out and have an institutional offer of shares to raise capital without having to be immediately constrained by what that does to the Government's controlling stake and does it take the holding below 50%.

The same powerful voices that were in the National Party's ear to sell down the assets in the first place will ultimately suggest that for the good of the companies and their flexibility the Government should sell down below 50%. Now of course the Government's given no indication it would do that but, don't worry, this will come, as sure as night follows day.

Fashions come and go

So, the other argument then is, perhaps these power companies are a dying breed. Certainly they are out of fashion at the moment.

When it lists on the NZX, Meridian (revenues of $2.7 billion in the year to June) will, with a market capitalisation of $3.84 billion, be possibly just slightly larger than that cloud-based accounting software company with plenty of blue sky in its share price, Xero, (current annualised revenues of $70 million).

The power companies have issues. Electricity demand is falling. And Meridian's biggest customer the Tiwai Point aluminium smelter will almost certainly not be around after 2017. And then there's the toxic Labour/Green single power buyer policy.

All of which means no power company is going to be hot to trot like a Xero in the next four years.

On the way out?

The question then is do you believe that the power companies are dinosaurs, set to go the same way as the prehistoric monsters?

The full answer to that question probably won't be known for 10 years at least.

If in 10 years+ time all homes and companies are powered by panels on their roofs then you've got to say the Government's maybe right in getting out at any price.

But fashions change. The power companies' big assets like the hydro dams will be around pretty much forever.

It's therefore a massive call to say today that there will be no value in those assets in say 20 or 30 years time.

But then this Government is not establishing any sort of reputation for long-term thinking and strategy.

Marked appreciation

I'm prepared to bet that after we've got through the next five years or so, we will see those energy assets appreciate - markedly.

So-called "defensive" stocks are out of fashion with the market at the moment. But they will come back into fashion. They always do.

However, with respect to Meridian and MRP, I  have concerns on what will happen to the companies operationally.

By offering shareholders in Meridian anything bar the kitchen sink (a 13% dividend yield in the first year?!), the Government has straight-jacketed the company for the foreseeable future. Meridian will have to pay out every spare cent of cash it generates (literally).

You have to ask what happens two, three and more years down the track when the impact of all the cash going out of the back door starts to affect the company's ability to reinvest in the business.

Drained of cash

And this isn't just Meridian's problem. Far from it. Poor old MRP, as the first asset off the block that now appears to have been sold too expensively (but in my view only relatively next to the gone-for-a-song Meridian), is now faced with having to rachet up its own returns to shareholders beyond those originally promised. This is so that it can keep its struggling share price up and shareholders something approaching happy.

The cash constraints the two companies will face lend further support to the idea that sooner or later the Government will sell down its holdings below 50%.

It's all a royal mess just waiting to develop.

So, the true time to measure what sort of policy the 'mixed ownership model' has been will be in 10-years-plus time.

People reading this now can happily look me up then and shout in my ear if I'm proven to be wrong but I would assert this: History will show that the shares in Meridian and MRP were sold for virtually nothing and that the mixed ownership model policy was an absolute disaster.

All this for the equivalent of two-and-a-half weeks of Crown spending...

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.. history will judge the policy harshly
As you noted;
MRP.. is now faced with having to rachet up its own returns to shareholders beyond those originally promised.
But the key word you left out there was "minority" in front of "shareholders".  In other words, the Board acted not in the best interests of its majority (i.e. public) shareholder - but instead in the best interests of its minority (i.e. private) shareholders. 
As they all will going forward.

Good point.

The question then is do you believe that the power companies are dinosaurs, set to go the same way as the prehistoric monsters?
The full answer to that question probably won't be known for 10 years at least.
If in 10 years+ time all homes and companies are powered by panels on their roofs then you've got to say the Government's maybe right in getting out at any price.
Not so sure given another journalist's view of the efficacy of solar panels.
If every square metre of roof and suitable wall in the UK were covered with solar panels, they would produce 9% of the energy currently provided by fossil fuels. Read more

In germany they are putting in PV's and that is or has destroyed the generatiors pricing model.  ie the generator makes its $s from peak load, eg air conditioning....when its PVs work at just the same time.
Now here in NZ we have lines companies and generators, potentially ideal for such PV work.  Unless the Govn blocks it in order to protect its income or asset sales/value.
"" I class as a bit of an idiot.

I love Krug , man ... not too early to getcha Xmas bubbles ordered , and a spare bottle for the Gummster .... pleeeeeeease ...

zerohedge, LOL and Niall there's a bigger idiot, he crits PK for not seeing this....oh yeah right....laughable...
Krugman of course has real economics and track record behind him, unlike most of the trolls who think he's an idiot.

And your pedigree is?

I look at their successes...their track record and make my own opinion and act on that. So I dont need a "pedigree" as such, I look at others "pedigree's" and that pedigree / track record is telling for some....NF is one.

... you're calling alot of people " idiots " today ...Prof. Niall Ferguson , George Monbiot , and you're including those of us who aren't fans of PK as " idiot trolls "  ...
Hulmey is right to ask you , what are your credentials to slag off at us all ?

a) you seem to attempt to slag me off and snipe constantly, so if you cant stand the fire, stay out of the kitchen.
b) Niall F of "austerity will work" [in-]fame. He's done one good piece of historical work, the rest of his work has been a bit dubious to say the least....and politically biased.
c) George M, well Ive read hs bits on and off for a while, I dont consider him honest or correct....
d) PK, not fans but really examine the track record. So yes he attracts a lot of detractors, many trolls indeed.
e) I said trolls who think he's an idiot btw.
Go for the argument, present quality data and information, rational logic, not political cw*p(TM).

Yes, Niall F calling Paul K  a poor economist is like the veritable pot calling the kettle black. One shouldn't throw stones in glass houses. 
Krugman is an idiot. He fancies himself to be a modern day sucessor to J M Keynes, though he's nothing more than a poor hack in comparison, though he does share his idol's talent in self promotion.

Well PK seems to be doing quite well on the economics side in terms of he ignores peak oil and blithy assumes we can get back to BAU if we only stimulate yes....but really compared to NF....yeah right.
Yes he isnt perfect, but given how badly and wrong most others are if he's an idiot, the others must be worse than cretins.  Now his tiff with Steve Keen was most interesting to watch...

Well if PK is an idiot, while getting so much right via Keynesian models etc, well that implies just about everyone else who got much if not it all wrong, cretins.
So sure show me someone who isnt an idiot and not a keynesian whos got the last 5 years more right that PK with their rational.  Possibly, Steve Keen / minsky excepted.

"In Germany they are putting in PV's"
The result?  From the locals ( - "Solar energy has gone from being the great white hope, to an impediment, to a reliable energy supply."
And pulling out Nukular in a fit of - er - nukaphobia.  "..government's nuclear phase-out plans ... German commentators agree there is no going back"
And burning Lotsa Luvverly Lignite to make up for the above two Gems of Irony.  Aided and abetted by, as the article notes, low carbon prices....
"Germany is the world's biggest miner of lignite, and the country's number two utility RWE is its biggest producer, followed by Sweden's state-controlled utility Vattenfall and Germany's top utility E.ON.
Poland, which has big lignite reserves, is also leaning increasingly towards the fuel.
The European Union requires every utility to buy permits for each tonne of CO2 it pumps into the atmosphere and lignite, or brown coal, is the most carbon-intensive form of the main fossil fuels (lignite, hard coal and gas) used to produce electricity.
But the price for such permits has dropped from a peak of over 30 euros ($40.05) per tonne in 2006 to under 5 euros.
Though dirtier than hard coal or natural gas, lignite power generation is attractive because German or Polish utilities can use ample domestic reserves instead of having to pay for imports as they mostly do for hard coal or gas.
Additionally, the recent collapse in carbon prices, coupled with low coal and relatively high oil and gas prices, means that revenues from burning lignite are now around three times higher than those of burning hard coal."
Ye'd haveta have a Heart of Stone not to be bent double laughing at a'this - unless of course, ya Lives there!

Interesting piece, of course like I said earlier there is efficiency and resiliance, mutually exclusive.
ie the overall context is lacking at times, ie get real we are going to find that the future is very expensive and we need this, just ppl are balking at paying, just wait is all I can say.
The article does raise many good points depending on the point of view from where you start. Just watch out for the slight of hand and vested interests.  And its an article of course not a peer reviewed publication....watchout for a castle on quicksand. 

Stephen Hulme - that's a silly comment.
Try removing the emotive desires, and the pre-held.
Just because there is a less-than-we're-used-to EROEI from solar PV, doesn't mean that we won't end up with it. That's a sliiy as a local Nat Party persona replying to my better-half suggesting that the sialge wrap the Party person had just burnt, might not be available in the future. "Oh, I don't think people will put up with that".
Your comment is in the same category. I call it arrogance. The planet  - on a sustainable basis - can supply just so much without being depleted/degraded. The only extra input is solar energy, the rest is a closed system. No matter what opinion any species has of itself, the physics of the situation applies/overrides. All stored energy is a once-off, solar is the default position. No, it's not as good as stored-over-aeons solar. Yes it's what we will have to live with. Get over it.

What do you think are the benefits of the Government having "control" of these assets?  What benefit do individual New Zealanders derive from that control? 

Very good point !

In theory under MOM they (Government/public) still have "control" as the 51% shareholder.
So I think your question is, what are the potential benefits of full public ownership of the electricity sector? 
And of course the main benefit of full public ownership would be electricity being delivered to citizens under a not-for-profit infrastructure model.   Same model as applies to reticulated water.


What benefit do individual New Zealanders derive from that control?
Limitations upon the amount of profit that can be repatriated offshore when, not if, these companies find their way to foreign ownership status.

... which is why the Gnats policy of keeping 51 % NZ state control of SOE's is infinitely superior to Labour's old model of selling it all off , 100 % , to mates and foreigners ..

Except of course it wasnt really Labour, but ACT in drag. 
Yeah sure Prebble and Douglas did a great job, not a Labour philosophy in sight.

Businesses seek to be efficient ie maximise return short term.  Resilance means for instance standby plant, more cost, yet no income, less efficient.  As a nation and as an national economy we need resiliance in the system. 
So I'd argue holding some utilities in public hands (or SOE) this then assures resources to businesses. This allows busineses to get on with business and not worry about say buying or its cost of standby power plant used once every 10 years for 4 hours or something.
Second providing electrical power at minimal cost ie no or little profit  means businesses and individuals have a lower input cost to their endevour rater than monopolistic prices making a good otherwise un-economic.  I saw that with telescum while trying to run a small ISP, telescum took all of the profit.

...I can only see the price of energy rising over time.  More people = more demand and from less resources.  Shares worth a long term hold.  At some point the Greens will wake up to the fact that rather than increase demand by lowering prices,  green principles allign more closely to ramping up prices, hiking up profits and then subsidising insulation - much better outcome.

One of the reasons power prices have risen over recent years may well have been that the vast majority of generating capacity was owned by the state and the motivation has been to maximise the dividend to the government. There has been no effective competition as Contact and Trustpower have just coat tailed on the dominant providers effective monopoly.
Although the state will still own 51% of most of the generators ,management cant now just do what the shareholding minister tells them. They have to act in the interests of the minority shareholders as well. If we have excess generating capacity , and particularly if Tiwai closes , we might see companies trying to maximise their own profitability by looking for market share and that could see power prices falling.
The problem to date has been market dominance. The solution might be genuine competition and the only way to achieve that is to have the state divest itself of some of the assets.

And competition in the cell phone market has done what for consumer price reductions when compared to that paid by citizens from other nations?
A thin NZ population spread unevenly over a mountainous terrain the length of the US Eastern seaboard is not conducive to competitive infrastructure placement for any necessary utlility. Might as well regulate a single provider to minimise the civil engineering costs before any other considerations are brought to account.

The difference is that the cell service providers have to build their own towers or pay their competition for capacity. With electricity transpower is providing the distribution infrastructure together with the lines companies and they are all monopolies.
The generators have colossal fixed costs and huge investments in production ( generating ) plant and very low variable costs of production, presuming they dont get charged for the water that goes over the turbines.The temptation must be to use the water and maximise market share.
I realise it is nowhere as simple as this given contracts and spot markets as well as the need to keep some water in reserve in case it stops raining and you have to buy power on the spot market to fulfill your contracts later, but with individual firms trying to maximise profitability I would have thought there was scope for prices to fall.

Exactly Stephen Hulme. This is why basic utility infrastructure has always been provided by the State. Even in the 17th, 18th, and 19th century England, the construction of toll roads, canals, and railroads required generous public land grants and the employment of Parliament's power of eminent domain to teamroll over the objections of recalicitrant holdouts, without which the development would have been impossible.

"So, the amount the Government will be taking in for MRP and Meridian (bearing in mind it won't get a third of the Meridian money for 18 months) would have kept the state machine going for a little over two-and-a-half weeks if applied operationally (which, yes, it is not going to be)."
Two and a half weeks are very long term for a moneychanging bankster PM. 

Re the value of Meridian.
In the last couple of weeks the government announced that it would spend $400 million building one school in Christchurch.  Meridian was sold at a total valuation of $3.9 billion, i.e. less than the cost of 10 such scools for 7 large Hydro Power stations, 6 major wind farms another two smaller wind farms and another projected wind farm.  These comparisons simply do not compute.  It looks like the tax payer has been robed of a lot of value that will ultimately end up in the pockets of John Key's mates.  He came into Parliment and this appeared to be one of his prime objectives. 

Contact Energy pulled in 200 000 Kiwi investors ...
.. MRP , half of that , 120 thou ..
Meridian ... 62 000 ... half again ..
... spot a pattern forming here ?
So ... Genesis , may only garner 30 000 or so investors ... which means , pre-demand will be way way down , the pitch may be low ... Genesis is the one to invest in ! .. unlike the others , it actually may be a fire sale ... hmmmmm ?

I think the dead cat may bounce.

Are you the head chef at a Thai restaurant ?
.. if they bounce... not so dead ... grab the meat tenderiser mallet

Hydro will be hugely 
useful in the future.  Fully agree. These companies are sold stupidly cheap.mind you the model underwhich they are owned is wrong.  Eg. The price of electricity should be 40% of the present price.

but this observer reckons history will judge the policy harshly......
Geeesus David , no points for seeing a dog that looks like a dog.......The policy itself is fraught with predictable outcomes designed to interest  yet more foreign interest in  expatriating monies to parts yonder.
As far as a sucess goes in the advertised plan..? a complete flop from the outset
As far as a sucsess goes in intended outcomes , prolly a raging success...
shifty lil monkeys......

MRP got 6.2 cents per kwh, and that' above other powercos.  Yet we pay 26 - 30 cents per kwh.  What gives?

The bit in the middle ( between the 6.2 cents and the 26-30 cents ) is lost  from air-to-earth leakage !
... I blame the Welsh for leekage  ...

As a wise man used to say. "It is the overheads that are the problem'.
That an ripping orf the customer.

... funny , I don't recall steven ever saying " It is the overheads that are the problem ." ..
Though Warren & Tarquin ( Hairdressers & Boofs to the Stars ) did say that whenever Bernard Hickey wandered into their salon on K Road ...

energy is an overhead...

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From the comments above it seems that the feeling is the government is giving these assets away for a song, which is way too much for New Zealanders to afford?
Personally I dont see why any shares should need to be marketed overseas unless they are dogs, as between ACC the Cullen fund, kiwi saver providers and retail investors should soak up attractively priced offers.

What I see is a very successul orchestra by the top dog corporations.
Stage 1, get the Right to work for the sale, the Left to work against it. Result, the market price for these stocks is good enough for them to grab it by the trailer load(s).
Stage 2 is to wait for a future Right government to offload the remaining 49%.
Stage 3 is to strip all the valuable assets off and run the power cos  to the ground.
Stage 4, get a left government to buy it back for double the valuation.
All the while make sure that the consumer is charged the 'market' price because the 'market' is always right.