Sunday, 13 November 2011


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.”

No comments:

Post a Comment