Gaynor on how mixed ownership can be a win-win

March 30th, 2013 at 2:00 pm by David Farrar

An excellent column by Brian Gaynor:

The writer expressed his strong opposition in the following way: “The [] represent asset stripping. They are publicly owned by everyone, including poor people. The dividends they produce will no longer be returned to the population as a whole but to a small, wealthy minority. There is no innovation or expansion, just a continuation of the rich getting richer, and the poor poorer”.

Gaynor first points out:

The first point is that the sale of 49 per cent of MRP to 300,000-plus New Zealanders is not asset stripping as none of the company’s assets will be sold for the benefit of the Crown or the new minority shareholders.

And in fact a mixed ownership model will allow the former SOEs to acquire more asset and expand, if they so wish.

The second point is that the Government will continue to receive 51 per cent of MRP’s dividends and the payout should increase in the years ahead.

is a good example of this.

The Mount Maunganui company listed on the NZX in March 1992 after the public acquired a 44.7 per cent shareholding. The Bay of Plenty Regional Council owned the remaining 55.3 per cent.

Port of Tauranga paid a total dividend of only $2.2 million in the year before its NZX listing and the Regional Council’s shareholding was worth just $44 million at the $1.05 a share IPO price.

Twenty years later the Bay of Plenty Regional Council’s economic interest in the port company has increased as follows:

The council’s shareholding has declined from 55.3 per cent to 54.9 per cent but the value of its holding has soared from $44 million to $1.015 billion.

The council now receives an annual dividend of $34.6 million from the port company compared with just $2.2 million when it owned 100 per cent.

This is the model that the unions and their allies have tried to destroy.

Everyone is a winner – the Bay of Plenty Regional Council and its ratepayers, Port of Tauranga’s minority shareholders and the company itself.

It is totally inappropriate to look at partial privatisation as a zero sum game, a game where there must be a loser for every winner. Partial privatisation can lead to a substantial increase in value and income for a regional council, or the government, if the listed company is well governed and managed.

Absolutely. There can be no argument that privately owned and managed companies do better overall than wholly owned public ones. By this I do not mean no private companies fail and no public companies succeed. Of course not. But if you look at decades of economic data across OECD countries, the difference is stark.

And Gaynor gives a local example:

In the following 12 years, before the company was taken over by its majority shareholder, the Auckland Regional Council’s economic interest increased as follows:

The council’s shareholding remained at 80 per cent but the value of its holding soared from $318 million to $678 million at the $8 a share takeover price

The council’s annual dividend from the port company jumped from $8.5 million to $34.3 million.

The company’s performance has been poor since it was fully acquired by the Regional Council, now Auckland City, in 2005.

Auckland City’s annual dividend has fallen from $34.3 million in 2005, when it owned 80 per cent of the company, to $20.1 million in the June 2012 year, even though it now has 100 per cent ownership.

When a company is 100% owned by the Government (or a Council), it will make sub-optimal decisions due to influence of the shareholder.

If they are listed on the NZX they have a legal duty to treat all shareholders equally and do what is best for the company as a whole. If the major shareholder wishes to influence their decisions they have to do so transparently through public shareholder resolutions.

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25 Responses to “Gaynor on how mixed ownership can be a win-win”

  1. seanmaitland (501 comments) says:

    From 2000 until late 2011, I helped run an investment club that consisted almost entirely of distinctly middle-class “mum and dad” investors, and we had shares in Ports of Tauranga, and did reasonably well off them.

    None of these people are wealthy by any stretch, yet our investment club made 20% after tax profit, on what we put in when we sold everything, even though we got hit by the GFC.

    The claims that this is only catering to the wealthy is nothing but blatant lies. Everyone in our club only put in $10 a week, not even the cost of a power ball ticket.

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  2. gump (1,662 comments) says:

    Brian’s article is well written.

    But the financial performance of both the Port of Tauranga and the Port of Auckland have been highly atypical compared to the majority of listed companies. It really isn’t sensible to frame an argument around them.

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  3. Adolf Fiinkensein (2,924 comments) says:

    Gump @ 3:02

    Pray tell why not? One is wholly gummint owned while the other is part privately owned.

    Perhaps you might give a dissertation upon the virtues of Landcorp versus some of the larger privately owned dairy farming companies?

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  4. Dirty Rat (383 comments) says:

    Gump.. I agree on that, and would be interested to see how skewed POT and POA’s performance’s were last year due to POA strike action, compared to previous years , and even adjusted to adhere with IFRS changes. There is a bit of a danger quoting numbers which are less than relevent now.

    Not saying he’s wrong but there were significant reporting changes during that period, and I assume some changes still in progress.

    Still, has to be better than one idiot who tried to compare Market Capitalisation/ Market Value with Equity…

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  5. Fentex (1,040 comments) says:

    I suspect a bit of post facto logic here.

    Why should a still majority public owned entity do better than wholly public owned entity?

    How can it be because of the partial private ownership when majority shareholders still have the balance of power. If the majority of shareholders are determined to be poor owners and bad managers how do the minority stop them?

    I suspect there’s another cause for success, which may be related if it correlates to part private ownership, but is not perhaps requiring of private ownership.

    When our SOE’s were first created something changed before the sales that saw increased efficiency and profitability before private ownership occurred.

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  6. Dirty Rat (383 comments) says:

    Fentex

    I agree with you there. Its not a Government Department, but an entity whose responsibility it is to maximise returns for Shareholders, ie..the taxpayer through the government.

    Maybe the issue may be the Government appointment of the Board of Directors, but that is all, and with the Government still the majority shareholding, I don’t see how that will change.

    But what I do see is a reduction on the returns to the new shareholders of Mighty River Power against the returns the Govt made from it…a massive one that is ( from all accounts I sorta recall that the Govt had a 400 million investment in MRP). 17% against the expected 6-7 % for purchasers.

    It would be interesting to compare the market value of MRP shares against the sale price..I suspect it would result in a loss for the Govt, because at 17 % return, you would require a mighty return on sale.

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  7. The Scorned (719 comments) says:

    John Roughans piece in todays Herald on Tiwai is well worth reading too….If it can’t pay a market price then let it die…

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  8. slijmbal (1,236 comments) says:

    “The dividends they produce will no longer be returned to the population as a whole but to a small, wealthy minority.”

    Gaynor seems to be forgetting that the future income stream was swapped for capital applied back to the population as a whole and used for the population as a whole. As poorer people are net receivers from the real tax payers via the government it is arguable that it is actually better for them.

    Fentex says

    “Why should a still majority public owned entity do better than wholly public owned entity?

    How can it be because of the partial private ownership when majority shareholders still have the balance of power. If the majority of shareholders are determined to be poor owners and bad managers how do the minority stop them?”

    Minority shareholders do have rights though poorly enforced in NZ. I suspect they would be better enforced against a government controlled entity as the offer is being pushed at the ‘Mom & Pop” investors and the political fallout of failing to do so would be difficult to avoid.

    Not sure about those who think most SOEs already behave like real commercial organisations rather than government owned entities with a profit motive. Those are very different beasts. I believe it is easier to do ‘rent seeking’ when owned by the government and have monopoly type approaches, which means the profit motive tends to be expressed in price hikes rather than ongoing improvements from competition.

    Let’s not forget Solid Energy is closer to a real commercial organisation than Mighty River Power as it has to sell its coal on the open market. MRP gets to sell its energy in the NZ market.

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  9. Viking2 (11,575 comments) says:

    From another point of view. POT didvdends obviously are not enough. BOP Regional never collected rates but used the dividends to carry out its function.
    Now though, BOP Regional is such a monster that not only does it spend all the dividends at the increased rate but it also taxes via rates each property owner in the BOP region. In Rotoura that’s another $230- 300 plus GST per household property. In tga its similar.

    All all this ownership largess has done is allow them to tax and spend.
    Perhaps it time they either cut their spending or sold their shares given that their appears to be a billon plus winfall for the rate payers. Having done that they should be shut down forever.

    POT will carry on doing better still.

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  10. Fisiani (1,048 comments) says:

    http://www.national.org.nz/bga.aspx

    It is clear that National is delivering the brighter future and will continue to do so.

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  11. mikemikemikemike (331 comments) says:

    I had an interesting point made to me today that I honestly struggled to argue against. Let’s say there are plenty of efficiency gains that can be made once MRP is owned by the private sector. The easy wins will be taken up quickly, resulting in increased dividends for all and everyone will be happy. Then; in a couple of years shareholders will want more return on their investment and so begins the trend of increasing power prices, the only weapon the market has against gouging the beejezuz out of us the captive market is by having competition…problem is of course that there isn’t any competition to be had. Which is why it might better to stay owned by ‘everyone’ with more effort being put into establishing a competitive market for wholesale power. Once this is done, then maybe it would be a good to sell it off (and all of it).

    Thoughts?

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  12. bhudson (4,741 comments) says:

    Quad-mike,

    The major flaw in the argument presented to you is that is doesn’t take into consideration how easy it is to switch providers.

    MRP directors might well want to raise returns, but raising prices are unlikely to be the easy way out for them – all too easy for the consumers to switch to whichever power retailer is cheaper (and take up the sign on bonus if they are still offering that.)

    Now cost focus is another matter entirely… Expect MRP to go on a big efficiency drive. Which is altogether not a bad thing as long as that drive doesn’t scrimp on major asset maitenance.

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  13. slijmbal (1,236 comments) says:

    @mikeetc

    except the government under Labour already did the hiking charges bit. We had truly amazing increases in power prices.

    I completely agree on the solution being having a solution that includes real competition.

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  14. mikemikemikemike (331 comments) says:

    @bhudson – MRP is a wholesaler who on-sells their power aren’t they? Consumers can switch their retailer but their power is purchased from the big guys. I’m not against the sale of the MRP – but the argument put to me today was a pretty compelling one.

    @slijmbal – Yes well thats a given, but just because they hiked it unmercifully doesn’t mean that the new owners won’t do the same. If I buy into something I want to see some returns on that money, and for MRP who can only make money by making power, or like Oil companies, limiting its generation and hence increasing demand relative to supply. Either way, we are agree without real competition in this space it appears we could all feel a wee tickle on the economic prostate from this one :) (would love to be wrong)

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  15. peterwn (3,312 comments) says:

    mikemikemikemike – The five major generating companies also have retail divisions following the Max Bradford reforms. They aim to match their customer base(Iincluding their geographic location) as closely as possible to their generation base so it is the ‘overs and unders’ that are traded. This is why the spot price market is very volatile – demand is not very ‘elastic’ hence it takes a high spot price to dampen demand. Residential / small business customers are protected from the market battlefield and also enjoy some political protection. Larger customers have meters that measure consumption in half hour chunks and often purchase say 80% on contract and 20% on spot price – depending on how much use they consider is ‘non essential’. Some over-commit to spot price purchases especially when lakes are full and lakes are running low, but then get a rude shock when spot prices shoot through the roof. They often then go running off to the Government screaming like stuck pigs.

    If Rio Tinto shuts the smelter, there will be one almighty shake-up in the industry especially in South Island and lower North Island. Meridian/Powershop IMO will aggressively try and build its customer base by persuading Contact, Trustpower and Genesis customers to switch. A constraint on this would be limited Invercargill – Clutha transmission that would partially ‘strand’ Mansapouri. Mighty River/Mercury would be less affected as most of their customer base is in the northern part of the North Island. There would be IMO some downward pressure in NI prices but that would be constrained by limited SI transmission and HVDC connection. However Mighty River can exploit any underutilisation of transmission to preserve its NI water (eg between midnight and 6am), so the effect of a permanent smelter shutdown would probably be neutral on Mighty River.

    What I am surprised at is the media are talking as if the Government has intervened and capitulated in a desperate attempt to keep the smelter open. It seems the Government has got directly involved for whatever reason and this seems to have been extrapolated by the media as a ‘done deal’. It media claims are true, there would seem to have been a serious breach of confidentiality somewhere and that would play right into Rio Tinto’s hands. Labour and Greens could not care less, since to them money grows on trees or can be easily printed.

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  16. bhudson (4,741 comments) says:

    Quad-mike,

    MRP has several retails arms – the largest is Mercury.

    The argument holds also for the wholesale market to the extent that the wholesale provider does not hold an overly dominant share – I.e. that retailers can source cost-effectively elsewhere.

    Apparently Mercury takes 90+% of the end-user sales for MRP. I took a glance at the 2012 financial report but couldn’t see a breakdown of sales into retail and wholesale.

    To the extent that Mercury is not taking up 90+% of MRP generation, MRP has to price accordingly to get other retailers to take up their power. If Mercury is taking the lion’s share, they have the retail competitive pressures to keep that demand.

    Whatever market MRP is playing in – retail or wholesale – they have to price to sell their generated power. If they want to increase returns, their most likely focus will be cost management – eking more profit out of their supply.

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  17. SPC (5,787 comments) says:

    Just maybe the port at Tauranga was always going to outcompete the one at Auckland, and ownership had little to do with that. Sure it required the management at Tauranga to perform, but this could have occurred under 100% council ownership.

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  18. bhudson (4,741 comments) says:

    @SPC,

    You mean just like Telecom performed under govt ownership?

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  19. slijmbal (1,236 comments) says:

    @mikeetc

    “@slijmbal – Yes well thats a given, but just because they hiked it unmercifully doesn’t mean that the new owners won’t do the same.”

    So, if a new owner does the same what is different? It is not an argument either for or against any level of privatisation. As I’ve already agreed the issue is getting competition. your point appears utterly irrelevant.

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  20. SPC (5,787 comments) says:

    bhudson, Telecom improved under the SOE model alone, a new private owner with a controlling stake then did well with the monopoly position and extracted some wealth to itself (and shareholders in the 90’s) in doing so – the company then struggled after its disastrous move into Oz and it’s failure to upgrade its lines, despite its monopoly, showing that competition rules are more important than ownership.

    You think Telecom performed well once a share market company?

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  21. Tom Jackson (2,553 comments) says:

    There can be no argument that privately owned and managed companies do better overall than wholly owned public ones.

    Your error concerns the meaning of “better”. Sure, they do better in market terms, but that’s no surprise. Any entity that is set up to please the market will on average do better than one that is not, simply because it is designed to do that. But to assume that increasing marketization automatically leads to increased overall efficiency is to commit the fallacy exposed by the “General Theory of Second Best”. Much of the facile free market propaganda commits the same fallacy.

    Real markets can’t and don’t adequately price all goods. It’s insane to think that they can. A piecemeal approach is better. Quite how conservatism got taken over by a creed as nutty as full on Marxism, I don’t understand.

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  22. bhudson (4,741 comments) says:

    You think Telecom performed well once a share market company?

    Unquestionably. Until David Cunliffee undermined the wealth of thousands of Telecom shareholders in 2008.

    The acquisition of AAPT was misguided. But certainly didn’t make the company a failure.

    It is quite some stretch to claim the SOE model as some saviour for Telecom performance- it was an SOE for all of three years before being sold.

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  23. Tom Jackson (2,553 comments) says:

    Comparing Telecom is comparing apples and oranges. Telecom deregulation and privatization has been an unqualified success. This is not an accident. The move to mobile makes it much easier to have a functioning market. Hell, even third world countries have cellular networks because its the sort of thing that naturally lends itself to the market system.

    Power is not like this. There isn’t the ease of varying productive capacity. Private power would work if everyone had solar and supplied back to the national grid, but it won’t work with present tech. All it will mean is paying too much for power.

    I love this blog. Most of you are fake conservatives who want to impose radical and unproven change on the rest of us. Tories my ass.

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  24. gump (1,662 comments) says:

    @Tom Jackson

    I would have described Telecom is a qualified success.

    The benefits did come to consumers eventually, but there was at least a decade of rent seeking.

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  25. Ed Snack (1,927 comments) says:

    Tom, if real markets can’t get the price right,then how in the hell can you think that any little coterie of experts would do any better. The evidence is in,”experts” do far, far worse, witness any centrally planned economy.

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