ASSET SALES IN A BEAR MARKET?

There has been a lot of heat generated in the debate over asset sales. ACT claims the assets are underperforming and need the discipline of the market. Key claims we need to sell a share of the assets to “balance the books faster.” Brent Sheather is an Auckland-based authorised financial adviser who has analysed the logic of National’s proposed partial sale of state assets and finds it wanting.

National’s sweetener is that part of the money from the sales will be used for schools, and hospitals etc:

“The spin is that if we sell up to 49 per cent of each of Meridian, Mighty River Power, Genesis Energy and Solid Energy, and part of the Government's 75 per cent stake in Air New Zealand, this will produce cash for an investment fund to buy schools, hospitals and fund transport projects.”

Sheather explains why some big hitters in the finance world either support asset sales, or are keeping quiet:

“But don't expect too much negative comment, because many people stand to benefit from these transactions. The management and/or directors of the privatised companies will be looking for share options that will massively reward them if the companies do well.”

Duncan Garner comments on the same point on the TV3 site, “But at Treasury the process has already begun – an Australian investment bank Lazard has been hired to prep their sale before voters have their say.
Labour has estimated Lazard will be paid a fee of around $100 million for their troubles. As Phil Goff puts it, “It’s a bloody rip off - $100 million to line the pockets of Aussie banks,” That’s money we should be keeping in New Zealand.”

Let’s deal with the ACT argument that the SOEs are underperforming dogs (admittedly this was came from the ACT Wairarapa candidate). If that was the case why is Key spinning the deal as being a great for “Mum n Dad” investors to plough their retirement savings into?

On another level, the assets sales don’t make economic sense. Sheather contrasts the two ways governments raise money – selling something or issuing debt.

“Let's look first at the economics. A government can raise money by selling assets or issuing debt. The price we get for assets versus the cost of borrowing the same amount is a good place to inform a view as to whether we sell or hold.
The secondary market in 10-year government bonds prices them to yield 4.4 per cent. The yield on five-year government bonds is just 4 per cent. To get these asset sales, the Government will need to price the companies at price-earnings multiples of somewhere around 14 to 16 times, which implies after-tax earnings yields of 6 to 7 per cent.
In lay terms, that means the Government is proposing to sell assets producing returns of at least 6 to 7 per cent a year after tax plus growth, when it could issue debt costing just 4 to 4.4 per cent. On the face of it, this doesn't look particularly bright, does it?”

In other words, National wants to flog off assets that provide a positive long term return, when short term capital expenditure can be funded from borrowing easily serviced from the profit generated from dividends. Make no mistake about it, SOEs have been a brilliant investment and what’s more they are owned by all of us:

“In terms of historical performance, the SOEs have been a good investment - Treasury reckons they have returned 17.5 per cent a year during the past five years. From a financial perspective, selling state assets is not a no-brainer. The real tragedy of these asset sales is that the average New Zealander will see his or her equity in these great assets reduced. At the moment, every New Zealander, rich or poor, young or old, has an equal shareholding in the assets proposed to be sold.”

So once these assets are sold, the wealth of some New Zealanders will increase and more of us will be poorer. This will hit home as the new boards begin to work to increase profits for the investors. Power prices will rise as this is the easiest way to bump up profits:

“While many individuals will buy shares in the new companies either directly or via their Superannuation or KiwiSaver Fund, there will be a much larger number of less well-off New Zealanders and young New Zealanders who won't be able to participate in any way, shape or form.
This sad situation will probably be compounded by the new "private enterprise model and strategy" implemented by the new boards of directors of the privatised assets, which is frequently spin for putting up prices and restructuring the balance sheet to increase borrowings. These two factors mean that, unfortunately, the rich will get richer and the poor will get poorer.
The only rationale for these transactions that might have some validity is that private ownership could introduce a higher level of efficiency into these state-owned enterprises. But is it realistic to think that the current directors and management of Meridian, Mighty River and Genesis are asleep at the wheel?”

The other question is why the hell are we selling our blue chip investments in the middle of a market slump? So when the market is at its lowest we are pitching our most valuable assets. It is bad business to sell at a low point in the market. I thought even Key would know that? It is highly likely that the old mistakes of the past are going to be repeated:

“Furthermore, all of the above assumes the mistakes of the past will not be repeated. New Zealand governments have a long and consistent history of selling assets at low prices to the private sector. Contact and NZ Rail are a couple of examples. How confident can we be they will get the pricing right here?”

Sadly we can’t trust Key that asset sales will stop with the power companies, Solid Energy and our airline. With Key you need to read the fine print printed on the back of the contract. As Garner sceptically quotes Key, “If we are the Government for the next three years and the process goes well, then we’re not in a position to say what we will campaign on in 2014 – we will cross that bridge if we ever come to it.”

KEY - INCREASE IN UNEMPLOYMENT SIGN OF SUCCESS

The other day John Key mocked Phil Goff over his costings with taunts of “show me the money.” Today Labour has released its costings. National will no doubt try and confuse matters. But one thing, as I demonstrated yesterday is that Key is dodgy with his own use of figures.

What cannot be disputed is that Key campaigned last election about reducing unemployment (it has grown from 95,000 to over 157,000), narrowing the wage gap with Australia (it has grown not reduced). Key chided Labour for the fact that 33,000 people had left our shores for Australia, yet under his leadership that figure has now grown to over 100,000. In addition we now have over 200,000 children living in poverty.

Meanwhile we have Key’s big idea from the 2009 jobs summit of building a national cycleway that would create some 4000 jobs. Aside from the interesting contradiction in using public spending to reduce unemployment (a contradiction because Key is actually reducing public sector jobs to increase unemployment), the actual number of jobs created by the cycleway is only 120.

As Phil Goff remarked today with the release of Labour’s figures, “show me the jobs!”

On the 3rd of November Key’s pronouncement about an increase in unemployment being proof that National’s policies are working was incredible. I quote from the Herald:

“Prime Minister John Key has reacted to unemployment figures released this morning, saying more people are seeking work, and "confidence is coming back".
The figures showed the jobless rate unexpectedly rose in the third quarter, with little evidence the start of the Rugby World Cup drove an increase in casual workers to service the wave of tourists.
The unemployment rate rose to 6.6 per cent in the three months ended September 30 from 6.5 per cent in the June quarter, according to Statistics New Zealand's Household Labour Force Survey.”

"More people are seeking work" and this is good? What planet is he on? The only reason more people are now seeking work, is that more people are out of work! This is weird it is like a cancer specialist telling a patient to relax because "relapse" means that they are cured. We would think the doctor was mad and change our specialist. Likewise with lunacy like Key’s, that an increase in unemployment shows the economy is on the up, New Zealanders should be waking up to the fact that it is time to change our Government as this current lot are out of touch and bereft of ideas.

The Second Leaders Debate

I smiled at watching John Key trying to get one over Phil Goff during the second leaders debate, with his shrill taunts, of, “show me the money, son!” He came across as an out of touch school bully who had lost the intellectual argument and reverted to shouting 'son' and 'show us the money'. Let us not forget that Key largely gained his experience at the now defunct Merrill Lynch, an investment business that went under through dodgy management from which fold Key was recruited into National. His so-called skill can be seen from his adding up in the Christchurch debate. $1.3 billion a year for 4 years is $5.2 billion not $6 billion (as claimed by Key) and over the previous three days his claims that Labour will increase debt have gone from $17 to $16 and last night $14 billion and all of this is done with double counting. Key adds in the projected short-term gain from asset sales to the cost of tax cuts. This is artifice they are two different things.

Key is claiming that not selling off assets will run up debt, this is a myth. Keeping the assets and the dividend they bring will help pay off debt and in the long run generate greater returns. Goff and Labour seem to have costed their policies to me, increase tax on those in the best position to pay more and introduce a Capital Gains Tax, which will over a period of time bring in billions.

I would rather have a long-term vision for New Zealand rather than short-termism from Key whose theory that tax cuts for the wealthy and cutting Government spending encourages growth has been rubbished by top experts. When President Obama uttered this mantra, the comments drew a rebuke from Nobel Prize-winning economist Paul Krugman, who said in a Web posting that Obama was embracing “the myth of expansionary austerity and the confidence fairy.” So here we go with Key, a brighter future consisting of shonky maths, and optimism sustained by myths and manipulation.

Welfare Changes Won't Lead to a Brighter Future

When National took over unemployment was at 17,710 it is now at 56,264. To force people to look for jobs that aren't there is bizarre. Similarly the solo mums I know don't "breed for the benefit." The way forward is to move people onto paying jobs. These changes don't create any jobs and just appeal to prejudices unsupported by facts or informed by reality.

These changes will do nothing to address the real concern that under National the gulf between rich and poor has grown and we now have 200,000 children living in poverty. These changes should not be seen as reforms, but rather a cheap shot appeal to the uninformed by a tired Government bereft of ideas and lacking in compassion.

Everyone would accept the basic premise that the way out of poverty is through paid work. But the corollary is that well-remunerated jobs must be available, along with quality childcare. Second, job seekers must have the necessary skills and health to be in those jobs, or be adequately supported to enable them to get the jobs available. National's benefit shake-up won't change this, unemployment has grown under National and there are an absence of jobs to actually look for.