Labour hysterically redefining privatisation

February 26th, 2014 at 2:00 pm by David Farrar

Most people know what privatisation is, which is the sale or transfer of a publicly owned asset to the private sector.

Labour is so upset that National has completed its asset sales programme, that Chris Hipkins decided to invent new meanings of privatisation:

“The Government is busy privatising facilities across the entire government sector.

“In education alone there are five charter schools opening this year and the Government is now taking applications for a second round of new privately run schools.

So a new not for profit publicly funded school, but privately managed, is now a privatisation. That is like saying that a new medical centre is a privatisation.

“The Government is also using the reconstruction of Christchurch schools as an excuse to privatise school facilities through the use of public-private-partnerships (PPPs).

Now Hipkins claims PPPs are privatisation. This is hilarious as he worked for Helen Clark when she was promoting them all over the place.

“National is also privatising our roads. A PPP for Transmission Gully has become an endless vacuum for taxpayer funding.

Even more hysterically Hipkins claims building a new road that doesn’t even exist yet is a privatisation. And he ignores PPP sees the road end up in state ownership. The level of hysteria and bullshit in this release is beyond belief. To quote NZTA:

While a private sector consortium will be responsible for financing, designing, building, maintaining and operating the highway for up to 25 years, Transmission Gully will remain a public asset.

And to add to his hysteria:

“In the health sector private hospitals and clinics are being used for elective surgery because the public system lacks the capacity to address our growing health service needs.

Hipkins knows that private hospitals performed elective surgery when Labour was in power. It’s so disappointing to see someone argue against using surplus capacity to treat more patients.

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Do the Greens support privatisation?

October 4th, 2011 at 4:14 pm by David Farrar

The Greens job document says:

… encourage employees to take an ownership stake in their companies.

I absolutely agree with the Greens on this. Employee should be encouraged to become share-holders in their employers. But why should the employees of Contact Energy be able to do so, but not Meridian Energy?

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The politics of asset sales

September 2nd, 2011 at 1:00 pm by David Farrar

My NZ Herald column is on the politics of asset sales. I look at the risks to the Government, and ask and answer the question about why they are doing it , despite the political risk.

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The 10% cap for SOEs

September 1st, 2011 at 8:36 am by David Farrar

The Government has announced a 10% cap for any one shareholder in the SOEs which will have minority stakes sold off, if the Government is re-elected.

This will have two impacts. The first is that it does mean that the Government won’t receive quite as much money as it would otherwise, for the minority stakes.

If your only aim is to maximise the initial share price, then you would sell them with no restrictions as Labour did in the 1980s. Buyers will pay more if they can gain a controlling interest or even a significant minority interest.

The cap will however make it less likely that a significant number of shares will be purchased by foreign companies. A 10% cap means that a foreign company won’t have enough shares to expect to appoint a director (in theory the Government with 51% could veto such appointments anyway) or be able to gain a sizeable enough stake so that they become an effective co-owner with the Government.

Now for a foreign company to gain shares in an SOE, means they have to be prepared to pay more for those shares than a NZ company or individual would. Now this will still happen to some extent as everyone can have a different view of a company’s value, but the proportion which end up overseas is highly likely to be quite modest due to the 10% cap.

I suspect there will be strong demand for the shares not just from individual NZers (who have around $300b in financial investments) but from KiwiSaver providers $9b (according to Min of Finance release), Crown investors (ACC, GSF, NZSF) $40b and Iwi $10b. All of those are likely to be long-term investors, not buying shares in an IPO to flick them off six months later.

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An advantage of listing SOEs

August 24th, 2011 at 11:15 am by David Farrar

Hamish Rutherford at Stuff reports:

State-owned Meridian Energy has taken a $90 million writedown on some of its niche businesses as part of a “tidy-up” as it prepares for life as a private company.

The National Government has said if it wins the November election it may sell up to 50 per cent of several large state-owned companies.

Announcing a 13 per cent fall in underlying profits at group level, the accounts of the parent company of New Zealand’s largest electricity generator showed tens of millions in writeoffs on loans and investments in subsidiary businesses which the company acknowledges it is unlikely to recover.

This is one of the significant advantages of allowing minority share-holding in SOEs. Being listed on the NZX means the companies have to be more transparent with their finances, and have obligations such as continuous disclosure.

As an SOE it looks like Meridian has been carrying these impaired assets for some years at an unrealistic valuation.  You can’t do that so much when you are a publicly listed company.

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Labour’s priorities

June 20th, 2011 at 12:24 pm by David Farrar

Tracy Watkins at Stuff reports:

Labour will introduce a bill preventing the sale of key strategic assets without a clear public mandate, says Labour leader Phil Goff.

Goff said the bill would require any future proposal to partly or wholly privatise a State-owned enterprise or Crown entity to gain support from 75 per cent of Parliament, or from a majority of voters in a referendum.

This is hilarious, because Labour is ensuring such a bill will never get drawn from the members’ ballot because they are filibustering the VSM bill.

A journalist should ask Labour if they will stop filbustering the VSM bill, in order to allow more bills to be drawn in a ballot, and giving their anti-privatisation bill a chance to be drawn.

I bet you the answer is no.

So what does that mean? It means that Labour value protecting compulsory student associations from voluntary membership more than they value stopping asset sales. Their number one parliamentary priority is stopping VSM at all costs.

Incidentially turning to the substance of their silly bill, I’ll support a law which requires a referendum to sell any asset, so long one also needs a referendum for teh Government to buy any asset (over a non trivial value).

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HoS on Key

January 30th, 2011 at 12:00 pm by David Farrar

The Herald on Sunday editorial:

Putting the merits of the sale plan aside for a moment, Key’s transparency is to be applauded. He said he would not sell off assets without the voters having their say, and they will get it, likely in November.

It is also heartening to see the Government doing something to put the brakes on its borrowing and to stimulate the moribund economy. Apart from the long overdue reining in of state sector costs, National has until now appeared to be indecisive and lacking ideas on how to help spark a recovery.

Of course, the moves are not a panacea, but they are a start. Upwards of $8 billion is expected to be raised in the sales and that money will go towards reducing our debt and into other infrastructure. They will prove a major boon for the sharemarket, with new listings just what the Capital Markets Development Taskforce says was needed to fire up the NZX.

As commentators have said repeatedly in the days since the announcement, the opportunity for mums and dads to invest in solid businesses that we know will continue to generate sizeable profits is likely to appeal to those burned by finance company collapses that have flushed away billions of dollars of savings.

With the Government guaranteeing to keep majority ownership, the biggest obstacle to sell-offs has been removed and there are more reasons to welcome the moves than to oppose them.

So the HoS supports the policy, what about the politics?

Key’s personal rating, however, should have been enhanced by the moves this week. He has been a populist leader so far in his first term and has been reluctant to rock the boat.

We have now seen strong, decisive leadership. That, more than the sales themselves, should be the most comforting aspect of the political week.

I agree.

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Tamihere on SOE part-sales

January 30th, 2011 at 8:26 am by David Farrar

Former Labour MP John Tamihere writes:

I support the partial sale of these assets regardless.

Majority ownership will be held by the New Zealand Government. New Zealand money, which is flooding offshore to invest in foreign economies, will have blue chip assets to invest in at home, whether they are Kiwi Saver or New Zealand superannuation dollars or dollars that would normally have flowed  to the failed finance sector. All require a safe investment haven and this policy provides that.

Further, it lessens our need to borrow and this will also lessen the amount of interest we need to pay.

No surprise that John Tamihere supports part-sales – he can say what he thinks now he is out of Parliament. I’d say it is almost a certainity that Phil Goff deep down supports it also, considering he was such an enthusiastic supporter of full sales previously. Of course he could never say so publicly.

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Easton on partial sales

January 29th, 2011 at 8:58 am by David Farrar

Stuff reports:

Brian Easton, an economist known for left-of-centre views, is wary the scheme will block future policy options for the electricity sector but supports the benefits it can bring to the local investment scene.

“By increasing the opportunities for New Zealanders by offering shares in minority stakes in SOEs, you would partly moderate the stupidity that happened over the finance company sector,” he says. “That enrichment of the financial market, which incidentally, curiously, Rob Cameron and I agree on, is a very strong case.”

And Mark Weldon notes:

“What I really like about the policy is it’s not left wing, it’s not right wing … It’s based on the Air New Zealand model which has the great attribute of actually being shown to work.”

Air New Zealand, 75 per cent government-owned since its taxpayer rescue 10 years ago, has performed well and delivered better dividends than the power SOEs in recent years.

“If you talk to [CEO] Rob Fyfe or [chairman [John Palmer] they will tell you that the majority long-term ownership of the government has been a real positive,” says Mr Weldon, “because it means they can focus on long-term planning and not worry about being taken over, as they would if they were a fully free-float company.”

As I have pointed out on many occassions, allowing the private sector to invest or buy some shares in state owned companies is absolutely common practice aroundthe world amongst governments of the left and right.

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Is NZ Labour more ideological than the Lao People’s Revolutionary Party?

January 28th, 2011 at 3:00 pm by David Farrar

I’ve made the point in the past that NZ Labour’s insistence that not even a single share of any currently owned crown company can be sold, is way outside the mainstream for not just the centre right but also the centre left. Left wing Governments around the world have seen the merits of allowing the private sector to invest in companies that were once solely state owned.

The latest example we have is in Laos. It is basically a communist dictatorship, and has been since the revolution of 1975. The Lao People’s Revolutionary Party is the only allowable party, and it is a Marxist-Leninist party.

But even in Laos, they move with the times and recognise unrelenting hostility to the private sector is ideological madness. A December 2010 news report states:

A state-owned power company plans to mobilise as much as 930.5 billion kip (US$115.4 million) to build more power plants after putting 25 percent of its shares on sale this week.

The EDL Electricity Generation Company is allowing local and foreign investors to subscribe for shares until December 24, after obtaining permission from the Lao Securities Exchange Commission.

The company will sell about 217 million shares, with about 86.9 million allocated to foreign investors and 119.4 million to local investors, at an initial price of 4,300 kip per share. Some 10.9 million shares will be available for purchase by company employees at 4,000 kip per share. …

The company will use the money it raises from the sale of shares to finance new power projects and maintain existing plants. …

The EDL Electricity Generation Company is the second state-owned enterprise to offer shares for public sale.

Let us hope that one day the NZ Labour Party may become less ideological than the marxist-leninist Lao People’s Revolutionary Party.

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Consumer on Power SOEs

January 28th, 2011 at 8:46 am by David Farrar

The Herald reported:

Consumer NZ chief executive Sue Chetwin agreed with Mr Key’s assessment that electricity prices would not increase with partial privatisation.

“The power companies over the past 10 years have been rapacious in putting up their prices and I don’t see that making part of the company available for the public to invest in will make much difference there.”

However, Ms Chetwin said companies would become more transparent and would have to explain their actions to the public.

“At the moment nobody really looks at the SOEs [state-owned enterprises] because their shares aren’t being traded. But once they are being traded, the company will have to adhere to stock exchange rules and be much more publicly available.”

Having a company listed on the stock exchange means that it has to be more transparent over what it is doing, and will also require public AGMs where minority shareholders can attend and speak.

There is considerable debate about the value of some of the power companies, and hence what is a reasonable return on their asset base. A stock exchange listing will also proviide a market valuation of the company’s worth.

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Labour’s challenge

January 27th, 2011 at 11:45 am by David Farrar

Labour have a challenge in whipping up opposition to National’s likely policy to allow people to invest in four power company SOEs, while retaining majority crown ownership and control.

When Phil Goff attacks John Key for a policy of minority stakes being allowed, John Key will no doubt point out that Phil Goff enthusiastically sold off 100% of NZ Steel, Petrocorp, DFC, Postbank, Rural Bank, State Insurance, THC, Maui Gas and oh yeah Telecom.

And worse Phil Goff sold them with no mandate, while John Key is doing the opposite – going to the voters saying this is what we will do (and only do) if re-elected.

I have no doubt National will lose some popularity if it confirms a policy of allowing minority private investment in those SOEs. But I beleive it will be relatively modest compared to what it might be if Labour wasn’t led by someone who was an enthusiatic champion of asset sales in the past.

Also of note, the Herald editorial welcomes the policy, and the fact the PM is risking taking on a sacred cow:

Courage in politics is seldom recognised when it is successful. It takes courage to challenge a sacred cow, but a well-aimed challenge can render the cow sacred no longer. John Key’s announcement of public asset sales yesterday should be recognised as a decision both courageous and well directed.

Importantly, Key has built up trust by keeping to the no SOE sales in the first term policy, so that voters can be reassured that any policy for the second term will also be adhered to and not exceeded.

The Prime Minister has made a very good case for the decision to partly privatise the state’s three power companies and its coal company and reduce its stake in Air New Zealand. He says the sales are primarily to finance the construction of other public assets that will be needed over the next five years.

Yes, the state is not reducing its total number of assets – in fact it is growing them.

The partial floats of Meridian, Genesis, Mighty River Power and Solid Energy, will bring some much-needed new life to the stockmarket and begin to provide an alternative to property investment for superannuation funds and personal savers.

This privatisation programme will favour local share buyers over foreigners, much like the sale of power companies in the 1990s. Unlike then, the Government plans to retain a majority holding. Mr Key believes this makes for the “best of both worlds”. The company is subjected to the discipline, reporting requirements and oversight of the sharemarket and the bulk of its dividends go to the public purse.

It is a bold plan and a sensible one. Public asset sales alone will not sustain the sharemarket or breed a new investment culture in the population. But they are a start.

If we want people to borrow less, and save more, we need to have companies they can invest in.

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Key signals less debt while Goff promises more debt

January 26th, 2011 at 11:48 am by David Farrar

Over two days we’ve seen two dramatically different paths outlines for the Government. Yesterday Phil Goff promised more borrowing and more debt. Today John Key announced the opposite – that National would reduce future spending to reduce debt – and also flagged allowing the private sector to invest in four current SOEs (which will also reduce debt).

This is excellent – both the reduced spending cap, and the flagging of an election policy to allow minority shareholdings in some energy companies.

Some extracts from Key’s speech:

Growth over the last decade was built on all the wrong things – debt, consumption, and government spending.

People borrowed heavily to buy houses and farms, property prices soared and New Zealanders felt wealthier as a result. They spent a lot on consumer goods, which led to a bubble of economic activity.

 The Labour Government thought this bubble, and the tax revenue it generated, would go on forever and spent up large on permanent new spending programmes. The Government’s spending increased by more than 50 per cent in just six years.

Labour literally had to keep thinking up new ways to spend money, as their refusal to drop tax rates led to fiscal drag and large surpluses. Rather than have modest spending growth, and lower taxes, they did nothing except huge spending increases.

The internationally-competitive sectors of the economy actually went into recession in 2004, and experienced a 10 per cent drop in output over the next five years.

A five year recession for the competitive sector of the economy.

By the time the National-led Government came into office at the end of 2008 the economy was deep in recession, and inflation was the highest it had been in 18 years.

The Government’s books had been left in a mess, with Treasury projecting no end to budget deficits and government debt spiralling out of control.

This is worth remembering – the official forecasts were for deficits and debt to be so big, that we would never ever return to surplus.

As an incoming government, we moved quickly to steady the ship, help the economy through the recession and set a credible path back to surplus.

 Even so, when we tally up everything the Government is spending this year, we still need to borrow $300 million a week on average to pay the bills.

 In the worst of the recession, running a budget deficit was the right thing to do, as it gave much-needed support to the economy.

 Now, as the economy recovers, borrowing $300 million a week is unaffordable and is holding the economy back.

 It is crowding out our internationally-competitive sectors of the economy, keeping the exchange rate high, and tying up resources that could be better used elsewhere in the economy.

And this borrowing will, of course, have to be repaid in future years, with interest.

Annual interest payments on our debt will, in four years time, cost more than spending on the Police, defence and early childhood education combined.

Which is why we need policies to reduce the growth in debt and lead us back to surplus.

When we are borrowing $300 million a week, have an overvalued exchange rate, and face the prospect of a credit rating downgrade, the Government believes it should be spending less and therefore borrowing less.

I have therefore challenged my Ministers to balance the books more quickly.

Government spending will continue to increase each year in dollar terms, but at a slower pace than the rest of the economy.

As the first step in reducing spending growth, we will run a tighter Budget this year than was indicated in the Budget Policy Statement in December.

Currently we have a new spending allowance of $1.1 billion each year, compared to Labour’s average of $2.8 billion a year over its last five budgets.

Our plan is to reduce that new spending allowance in Budget 2011 even further, to around $800 to $900 million.

Nonetheless, this year’s Budget will continue to prioritise new spending to health and education in particular, and to initiatives that promote economic growth.

 This would be a good time for the PPTA to reconsider the wisdom of ongoing strike action for their 4% pay claim.

Key says that Treasury project this reduction in future spending will see NZ get back into surplus in 2014/15 instead of 2015/16. This of course will only occur if the 2011 – 2014 Government has tight fiscal discipline.

Now onto the capital side:

The Investment Statement shows that the government, on behalf of taxpayers, owns $220 billion of assets across a whole range of social, financial and commercial investments – everything from hospitals, roads, prisons, schools and Police stations to the Super Fund, electricity companies and coal mining operations.

We also expect to acquire $33 billion of net new assets over the next five years, including new schools, operating theatres, ultra-fast broadband and major investments in our state highways and other transport infrastructure. That is a considerable spend by any reckoning.

At the margin there are two ways we can acquire new assets – either we can borrow more or we can change the mix of assets we own.

Indeed, and it is stupidity to insist that our current mix of assets is perfect, and in no way can any existing asset be sold or even sold down.

The greatest scope to change the mix of assets lies with the government’s portfolio of commercial assets.

In particular, the sort of mixed-ownership model under which Air New Zealand operates – where the government owns most of the company but there is a minority of outside equity – gives the best of both worlds.

Under this model, the government has a controlling stake in what is a crucial piece of transport infrastructure and guarantees that it will be majority New Zealand owned. But by not owning 100 percent of the airline, the government also has capital free to invest in other assets.

This model could be extended to more of the government’s commercial assets.

As well as freeing up capital, there are three other potential benefits of a mixed ownership model.

The first is that it broadens the pool of investments for New Zealand savers, either directly themselves, or through investment funds such as KiwiSaver.

New, quality listings on the stock exchange would give “mum and dad” investors the option of putting their savings into large and proven companies, rather than relying, as is so often the case, on property investments.

The second is that the company reaps the benefits of sharper commercial disciplines, more transparency and greater external oversight.

Under the mixed ownership model Air New Zealand has been a creative and innovative company and a model corporate citizen. It has also offered some very competitive prices for air travel.

I am convinced that Air New Zealand would not be run as well, nor provide as good a service to customers, if it was owned 100 percent by the government.

And the third potential benefit is the opportunity for the companies involved to obtain more capital to grow further, without depending entirely on a cash-strapped government to support them.

Having some SOEs able to access capital, without the taxpayers having to borrow more will be good for them, and allow them to grow.

And NZ investors would love having some solid companies to be able to invest in – which will help boost savings.

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.

The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.

Only the companies I have just mentioned will be considered for a mixed ownership model.

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.

The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.

Only the companies I have just mentioned will be considered for a mixed ownership model.

Yay. We are currently the only country in the OECD that has a policy based on pure ideology of banning any private sector investment in current state assets. This probable policy is a step in the right direction.

It is subject to finalisation and approval from voters at the 2011 election. It will maintain Government control of the five companies, but allow for Kiwi mums and dads to invest in those companies, providing the companies with capital, and the investors with good returns.

Kiwis will have some clear choices for the 2011 election – policies which boost savings, reduce future spending and reduce debt vs policies to tax rich pricks more and borrow more.

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An outright fib

December 12th, 2010 at 10:46 am by David Farrar

Matt McCarten writes in the HoS:

John Key, a successful corporate speculator himself, has announced that if the National Party is elected again then he’d see that as a mandate for selling off the rest of our public assets.

Except he has said no such thing.

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NZ Herald on SOEs

December 1st, 2010 at 7:32 am by David Farrar

The NZ Herald editorial:

The labour Party’s finance spokesman, David Cunliffe, raised some eyebrows last Thursday when he spoke favourably of allowing state-owned enterprises to form subsidiaries in partnership with private shareholders.

Could it be that Labour is relenting on the stern anti-privatisation stance it adopted under Helen Clark?

Alas, no. Mr Cunliffe was talking strictly of subsidiaries. It would be an enlargement of the state’s role in the economy, not a diminution of it.

Even the Clark Government was open to this idea. Trevor Mallard, urged it upon the SOEs when he was minister of state-owned enterprises, though nothing happened.

Mr Cunliffe, in his speech at Victoria University, cited Kiwibank as an example of a subsidiary that had added value to its state-owned parent, NZ Post. The next day he made it clear Kiwibank would be excluded from the envisaged private partnerships.

So alas, it is a policy from the Clark Government.

This policy will not answer the Stock Exchange’s prayers for blue chip listings of public utilities. But unless the National Party leadership has more gumption on that subject in a second term, there is not much prospect of SOE share floats from either of the main parties.

The bipartisan policy on no asset sales is I suspect unique in the developed world. And that is not unique in a good way.

Labour probably wants to sound more moderate and reasonable on a subject such as privatisation, even if its real motive is to increase state participation in the economy.

This is true, but they may find it hard to explain why they are pro-private sector investment in “new” assets ut 100% against in existing ones.

At least the policy Mr Cunliffe has revived, and the Government can readily endorse, opens the way for private enterprise to propose projects to SOEs and tap their resources. That sort of investment could be better for the country in the long run than passive private holdings in the parent utility.

No company should need additional capital unless it has something new to do. In that event, it is sensible to set up a subsidiary to do it.

With the benefit of private investors’ assessments of value, and the discipline of sharemarket accountability, the foal would outshine the horse. The state should open its stable and let all its enterprises reach their potential.

I agree.

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Some common sense emerging from Labour

November 29th, 2010 at 7:13 am by David Farrar

On Friday, Labour released a speech David Cunliffe gave on Thursday. It gave me hope for a more rational Labour Party. First:

Crucially in a capital constrained fiscal environment, we will better leverage the Crown’s balance sheet in new and innovative ways.

We can expand public-private partnerships for new transport infrastructure.  The project scale must be right and the PPP benefits must outweigh any increase in cost of capital, but that leaves plenty of scope for win-wins .

Yay. PPPs should be on the table as an option in pretty much all circumstances. Decisions on whether to have a PPP should be made on the merits of an individual case. Great to see Labour starting to take steps away from ideology and towards rationality.

We can unleash State Owned Enterprises to create and grow new subsidiaries with private partners and shareholders, without diluting the taxpayer’s equity, or wholly or partially privatizing the SOE.

Again this is a good step in the right direction. While still a very modest step, it at least means that Labour are no longer saying the private sector has no role in assets owned by the state. And trying to argue that a partial stake in an asset owned by an SOE is good but a partial stake in an SOE is evil, will test the finest debaters.

Now Labour have pointed out that their policy is intended to apply to new subsidiaries only, but that is frankly illogical. Take Kordia for example. A while back they purchased Orcon. This means the taxpayer now owns an ISP. Labour seems to be saying that Kordia is not allowed to sell Orcon.

This is the bizarre outcomes you get from blanket bans. Private sector investment in any state asset should be considered on a case by case basis. There is a pretty strong argument to own Transpower, and there was a very weak argument to own a chain of competitive vehicle testing stations.

In the legal area, National has in fact nationalised certain aspects (crown defence service) and allowed private sector into others (build and manage a prison). That is because decision are being made on the basis of what will achieve the best outcomes.

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The SOE challenge

June 18th, 2010 at 7:47 am by David Farrar

The Herald reports:

The chairman of Solid Energy says at least part of the state-owned coal miner should be sold off to raise billions of dollars needed for new projects, including more mines.

John Palmer – who is also chairman of partially privatised Air NZ – said Solid Energy needed up to $10 billion in additional capital over the next five years, and should be partially privatised if National wins a second term in office.

That was the best way to provide the money, given the state of the Crown accounts, he told the Herald yesterday.

“I don’t think it makes a lot sense for the Crown to put several billion dollars into a company like Solid Energy where it can retain all of its existing ownership and leverage and external capital can provide the opportunities for growth. It’s very much a win-win situation.”

Solid Energy is not a monopoly like Transpower or NZ Post. It is not a utility- it is a competitive business undergoing commercial activities that are not guaranteed to be profitable.

If Solid Energy can not access extra capital, it will not be able to reach its potential, which may mean less tax revenue and less jobs in NZ.

But do we want the NZ taxpayer borrowing money to invest in Solid Energy, and assuming all the risk? I think Palmer makes a good case for that risk to be shared around.

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Hooton on Privatisation

May 28th, 2010 at 11:00 am by David Farrar

Matthew Hooton in NBR points out that in Government Trevor Mallard pushed for private sector investment in some SOEs and/or their subsidiaries. Mallard was right to do so then, and it is still right today. Extracts:

The state manages an SOE portfolio with total assets of $47 billion, more than the market capitalisation of the NZX 50.

Nothing about the portfolio is rational, consisting simply of the leftovers from the large trade-sales of the 1980s and 1990s. Alongside overinvestment in sunset industries, like regional rail and post, sit electricity companies and odds and bobs including a mining company, a manufacturer of pest management products, 371,000 hectares of corporate farms and an educational materials publishing house.

And it is ridicolous to say that this must be frozen in stone for all time.

Mr Mallard hoped that some growth could be funded off SOEs’ own balance sheets but he was also keen for them to partner with the private sector to develop new subsidiaries, which would be listed on the NZX. This, he argued, would provide depth to our capital markets and improve the transparency of the SOEs.
Mr Mallard was clear he was not interested in the type of wholesale privatisations that occurred when Labour had last been in power in the 1980s, but stressed that sell-downs or sell-offs of discrete new SOE investments should be allowed.

This is the challenge. Some SOEs are doing well, and want to expand – often into riskier overseas ventures. They should be able to do so, but the capital for such expansion need not come just from the taxpayer.

Foreign ownership is the big political bogey. If the taxpayer retaining an overwhelming majority stake is not enough, it may even be possible to develop an equity product restricted to the proverbial Kiwi mums and dads. It wouldn’t be as valuable as if it could be on-sold to anyone but that would be something the initial subscribers would know in advance.

Such a policy would not in fact be contrary to WTO rules, as claimed by the CTU.

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Editorials 26 May 2010

May 26th, 2010 at 12:00 pm by David Farrar

The Herald supports a float of Kiwibank:

The Prime Minister has indicated that any part-sale of the bank would be a public float aimed chiefly at mum-and-dad investors, not a trade sale, and that the Government would want to retain a majority shareholding.

As such, he is extolling the idea of a shareholding democracy, a concept that has flourished in Britain and Australia but which enjoyed a regrettably brief currency here.

Floats of the likes of Vector, Contact Energy and Auckland International Airport proved, however, to be hugely popular with Mr Key’s target shareholders, who recognised the opportunity for steady incomes and long-term returns from such utilities. …

The bank’s success means it needs substantial amounts of capital to grow further.

A cash-strapped Government would be an unwilling source. Nor would it be likely to be able to orchestrate a trade sale because potential buyers have their eyes fixed on the burgeoning Asian market.

Indeed, the Government might even see a rationale for keeping Kiwibank in New Zealand hands, if only to provide consumers with choice in a market dominated by Australian-owned competitors.

Everything, therefore, points to a float. The Government should not hesitate to confirm as much in the most unambiguous of terms. And to state that, finally, the country will have the chance to fully embrace the benefits of a shareholding democracy.

Hear hear.

The Press tuts tuts Fergie:

A British tabloid newspaper reporter, Mazher Mahmood, had revealed a sting operation against the duchess, in which she was filmed demanding, anything but selflessly, NZ$1.074 million from an undercover reporter in return for access to the Duke of York, Prince Andrew, who is her former husband.

The cash-strapped but big-spending duchess has subsequently apologised for what she called her serious lapse in judgment. But no apology can undo the damage this affair has done to her own reputation and possibly to that of the prince.

The duchess has long been renowned for her gaffes but this scandal is far more serious. She was trying to exploit her position as the prince’s former wife and use him to gain financially.

Very tacky.

The Dom Post talks Auckland super city:

The Government’s efforts to assuage concerns about the Auckland super-city by strengthening the transparency and accountability of the organisations that will run much of the city deserve support.

Change was needed in Auckland. Local government there was a fractured mess. Planning on Auckland-wide matters such as transport continually foundered on the egos of local body politicians.

One council, and the move to council-controlled organisations, should help break the jam and start solving Auckland’s massive infrastructure problems. …

Allowing Auckland Council to require them to hold meetings in public will go some way towards that, though those who follow local body politics know that it is all too easy for even elected councils to dodge transparency by going into committee and shutting the doors on the public.

Making the CCOs subject to strategic plans set by the council means setting overall goals is the job of those who must answer directly to voters. That is what is needed in a democracy.

In a few years Aucklanders will wonder what all the fuss was about, and why id they wait so long to rationalise their local government structure.

The ODT looks at the oil spill:

The news from the Gulf of Mexico is not good, and there are lessons to be learnt in New Zealand – and, more specifically, Otago – from the oil disaster and its subsequent handling.

Foremost among these are the very real economic and environmental dangers associated with deep-sea drilling such as that which has been mooted for the Carrack/Caravel site off the coast of Dunedin. …

You have to feel sorry for Louisiana especially.

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Second term asset sales

May 22nd, 2010 at 8:26 am by David Farrar

New Zealand is the only country in the OECD that has a ban on asset sales. Even socialist governments throughout Europe have sold assets where there is no need for the state to own them, or at least own 100% of them.

A welcome sign that National may go into the 2011 election with a more flexible policy is reported by the NZ Herald:

The National Government has given its strongest indication yet that it will sell state-owned assets should it get a second term.

Finance Minister Bill English yesterday singled out Kiwibank as a particularly attractive asset for buyers.

But he said the Government would not sell assets without a mandate from the public.

The public will get to decide.

Mr English, fresh from delivering the 2010 Budget, told a gathering of South Island business people yesterday that the Government might consider a change of policy “to free up capital and put product on the market for Kiwi mums and dads”.

Kiwibank was a good example of an asset that needed to be dealt with. It had reached the size where it needed either a Government guarantee or an “awful lot of capital”.

“If there’s any asset that’s regarded as risky by credit rating agencies, it’s a small, fast-growing bank,” he said.

“So one option would be to go to the market and raise capital. Keep majority Crown ownership, but raise the rest of the capital from the market.

Makes sense to me.

Labour leader Phil Goff said state-owned asset sales were “absolutely all on” if National won a second term, “and they might not even wait until then”.

Mr Goff should know all about selling assets without a mandate. However National has made it very clear they will only sell or part sell significant assets with a specific mandate.

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Sensible use of the private sector

April 8th, 2010 at 4:00 pm by David Farrar

The Dom Post reports:

About 250 Wellington patients will have their operations in private hospitals after district health boards decided they could not meet Health Ministry elective surgery targets without help.

Hutt District Health Board is negotiating with Boulcott Hospital to perform about 50 mostly ear, nose and throat operations, while Capital & Coast District Health Board has asked private hospitals to carry out 200 cataract operations.

Hutt chief executive Michael Hundleby said the board turned to Boulcott Hospital because it was concerned that Wellington Hospital – which does 40 per cent of Hutt DHB’s surgery – did not have the capacity to complete the operations.

Some on the left will cry out that this is privatisation. I suppose they would rather those patients simply remain on the waiting list rather than have the private sector provide the operation. Who cares about quality of life so long as we are ideologically pure eh.

Health Minister Tony Ryall said he was not concerned that DHBs were using the private sector to help them meet the health targets, which were introduced last year.

“Our priority is that patients are treated and in the Wellington region we’ve had a record total of 11,232 patients getting the elective surgery they need.”

Great.

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The Capital Markets Report

December 17th, 2009 at 12:11 pm by David Farrar

The full report is here. Some of the recommendations and my comments are:

• simplifying and standardising product disclosure sothat investors have clearer knowledge of what they are investing in (such as through short, prescribed, plain-English documents and an explicit warning on complex
products)

Not controversial.

• broadening the range of high-quality equity offerings for retail investors by encouraging partial listings of:

• central and local government-owned companies
• agricultural businesses
• local subsidiaries of financial services firms

I think that is a great plan. There are not many NZ listings, so investors like me are forced to invest more and mroe money in Australian stocks. Partial listings of some SOEs would be a great boost to the local capital markets, and keep more investment at home. The disciplines of being a listed company would help many SOEs improve their performance.

The early signs are that National may have a policy for the 2011 election of allowing some minority listings – that would be a good thing.

• improving the links between public listed and private markets by facilitating the development of more lightly regulated exchanges that are able to develop rules and be owned or operated by fully regulated exchanges

The rules of the main public exchange are not suitable for smaller companies, so this is good.

• developing a specialist agricultural capital market centre – ranging from the commercialisation of innovation through to public markets that cater to cooperatives’ particular requirements and the development of derivatives markets for our agricultural products

That’s a fascinating idea. It could even become a global leader in agricultural capital markets.

• fundamentally reviewing the Securities Act to allow for the above, in a way that plays to New Zealand’s reputation as an honest and transparent economy, and provides clarity about which investors are able to invest
in which markets and the nature of the regulatory regime around each market

I’m not sure the Act needs rewriting. Often the problem has been lack of enforcement. I recall the case taken by Stephen Franks and Roger Kerr personally against a company director, when the Securities Commission declined to act. They were successful also IIRC.

• eliminating tax and regulatory biases between different types of investment (for example, property versus financial assets) or different governance arrangements (such as direct investment versus PIEs).

At present, many investment decisions are based on the tax advantages for that type of investment. That is not optimal, as decisions should be on the likely return and associated risk with an investment.

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Rudman waters down the hysteria

November 10th, 2009 at 3:21 pm by David Farrar

At times Phil Twyford reminds me of Chicken Little. He runs about a lot claiming the sky is falling in over the Auckland Super City. Absolutely everything is to do with privatisation. I think he’d call more money for Libraries as privatisation, as Libraries buy books from the private sector!

Anyway Brian Rudman has an interesting column today, which waters down some of the hysteria from Twyford. Rudman is from the left also, but isn’t a politician. Rudman writes:

Also dumped was a proposal to amend the Local Government Act to permit “divestment of council [water and wastewater] supplies to the private sector”. The Cabinet decided instead on a minor change, extending the time limit on any contract a council made with a private water supplier or operator, from the present maximum of 15 years to 35 years.

Mr Hide received another bloodied nose over his proposals on the expansion of Watercare Services into the sole provider of all drinking and wastewater services to the new Auckland Super City.

He wanted to scrap legislative requirements that Watercare pay no dividend and that it “manage its business efficiently with a view to maintaining prices for water and wastewater services at the minimum levels.”

He argued to the Cabinet that “the Auckland Council, as the sole shareholder, will be best placed to direct Watercare, through its constitution and statement of intent, in how water and wastewater services are to be priced to achieve its broader objectives.”

His “sleepy” Cabinet colleagues managed to stay awake long enough to vote both of these proposals down.

Now some of you, like me, might actually have wished Rodney got more of his proposals through.

The point of the post though is to highlight the gay between Twyford’s hysteria and the reality. Rudman continues:

The Government’s attempt to keep the money we pay in our water bills going on water services is commendable.

People more savvy on these matters than me also say the prohibition on dividends and profit-taking will be a dampener on any foreigner contemplating a bid on this $5 billion asset. That’s if it ever gets to that, and only extremists on the edges of the Act Party and water campaigners who enjoy scaring themselves to sleep each night, seem to think this is a possibility.

Scaring themselves to sleep and boring everyone else to sleep I think.

Sure, the Cabinet has endorsed Mr Hides’ proposal that come 2015, the Auckland Council should be allowed “to determine … the governance arrangements and asset ownership for the delivery of water services.” I’m relaxed about this. While I see no reason to even bring the issue up in 2015, if the UMR poll, Labour’s Auckland issues spokesman, Phil Twyford is waving about is accurate, it’s a non-issue. The poll shows 85 per cent of Aucklander oppose privatisation of their water assets.

Mr Hide’s argument is that once the new Auckland council is bedded in, it should be allowed to decide on issues such as the governance of asset holdings in Watercare.

At least Wellington is letting us have a say for once. We should treat that as a breakthrough and a precedent, not a threat.

Phil constantly advocates that Wellington should be running Auckland more.

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SOEs buying private companies

October 26th, 2009 at 1:00 pm by David Farrar

The SST reported:

THE GOVERNMENT will become one of the biggest players in the commercial property services market following Quotable Value’s (QV) takeover of DTZ.

QV has been in negotiations to buy the New Zealand arm of DTZ, a large publicly listed valuation and property management company based in the UK.

Neither company was responding to calls on the subject last week, but the Sunday Star-Times understands that DTZ’s staff have been told the takeover will proceed and both sides have been putting the finishing touches to the deal.

QV is a state-owned enterprise and its takeover of DTZ will create a property services company with turnover of nearly $70 million, making its easily the biggest property services company operating in the commercial property market.

While in one sense it is good to see an SOE operating commercially and making good commercial deals, it concerns me that they do so with taxpayer money, and an implicit Government guarantee.

Much the same happened when Kordia purchased Orcon. A smart strategic buy for Kordia, and some useful finance for Orcon, but should the NZ Government own an ISP and a commercial property company?

The Government has promised not to see any SOEs during this term. I hope that they have a more flexible policy for the 2011 election, which would allow the Government to exit areas that are commercially competitive.

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UK Labour to do asset sales

October 12th, 2009 at 3:50 pm by David Farrar

Reuters reports:

UK Prime Minister Gordon Brown plans to sell off 3 billion pounds (NZ$6.47bn) worth of government assets.

The asset sales will be carried out over the next two years, and include betting company the Tote, the cross-channel rail link between Britain and France, a portfolio of student loans and the government’s stake in uranium-processing firm Urenco.

The bridge and tunnel crossing over the River Thames at Dartford is also up for sale, and local authorities are expected to raise a further 13 billion pounds (NZ$28bn) through asset sales on top of 30 billion pounds (NZ$65bn) already identified in a 2007 report …

What a shame that the British Labour Party will sensibly sell some assets that are better in private hands, and the NZ National Party will not do the same.

The Labour and National consensus to rule out all assets sales, no matter how logical, is the most extreme in the western world.

I do not advocate National breaking its promise not to have asset sales during this term, but they’d better have a more rational policy going into the 2011 election. If Gordon Brown can do it, so can we.

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