Talking of lies, how about those on asset sales

Phil Goff is going to spend most of his last week saying that voting Labour is the only way to stop “your assets” being sold for-ever, and that once gone you can never get them back. Media have not caught on to the contradiction that he then talks of how Labour, umm brought back two previously state owned companies. How is that gone for ever?

But even that misses the main point. The Government is not selling any assets. They are selling a minority stake of shares in companies that own assets, and there is the world of difference. The Government maintains at least 51% ownership and majority control. On Twitter last night there was a debate about what is the difference between the Government owning 51% of Air NZ and 76% (the status quo) or even 100%?

The Labour flunkies could come up with pretty much one thing only – the Government could no longer approve major transactions by itself. However when asked if any Government had ever had to approve a major transaction in the last 15 years, they could not provide an example. The reason for this is the threshold is huge – over 50% of the asset base of a company.

One flunkie then got all excited and started implying that secret instructions were given to SOEs via CCMAU. Now personally I regard such paranoia as akin to the being a birther or truther, but let’s say for a second he is correct. That Governments have been giving SOEs secret instructions on what to do.

Well by listing on the NZX, this would no longer be possible. Directors would face criminal sanctions if they took heed of such secret instructions. Anyone who believes in transparency would welcome this. And by chance, there is a good article by Hamish Rutherford at Stuff:

PROPONENTS of mixed ownership argue that having three large state-owned players in the electricity market leads to decisions being made that would not stack up in the private sector, because processes are less robust and more political.  …

One said that the complexity of investment decisions for power stations meant that a range of assumptions had to be made about factors such as future electricity prices, and the boards of directors and Treasury officials were not as well equipped as the market to question the thinking behind them.

“In a listed environment you’ve really got to explain yourself to shareholders and analysts, whereas in an SOE environment you don’t. There’s not anybody putting real pressure on you to justify and explain your actions and you’re not getting assessed day to day by your share price.

“It’s difficult to replicate those pressures when you’re state-owned.”

While the “discipline” would be at odds with political pressure not to raise electricity prices for customers, bad investment decisions meant higher prices than good ones.

“There’s no free lunch here. Either we’re benefiting through inefficient capital allocation into the SOEs, or we’re paying higher electricity prices, but either way, the populace pays.”

Being listed on the NZX significantly increases transparency and accountability.

Mighty River Power chairwoman Joan Withers said while the sharemarket could bring “positive discipline”, the company was not lacking in any of the skills needed to cope with life on the market.

The current structure had not been unduly restrictive, Withers said, with the Government allowing it to embark on a large geothermal project in Chile.

NZX chief executive Mark Weldon said while the energy companies should be looking for overseas opportunities, they faced the restriction of an indebted government in the current structure.

And this is another reason for the mixed ownership model. Being in business involves risk. Several of the SOEs think they can be more profitable (and earn money for NZ) by expanding overseas. But this may require increased capital or decreased dividends. Now I’m not wild about the idea of the Government deciding whether or not to invest $1b in say a Chile geothermal project rather than schools and hospitals. Now sure, the Chile project may actually turn out to be profitable, but it may not. These ventures involve risks. So sharing that risk with private sector investors is a good thing, and should lead to better decisions as when it is people’s own money at risk, they are more critical analysts.

Rod Oram in the SST weighs against the mixed ownership model. This is no surprise, but it is worth considering the points he raises:

National says it will spend much of the $5 billion to $7b of sale proceeds on the likes of schools and hospitals. But it’s bad financial management to sell productive assets to fund projects that could be financed more cheaply by debt.

This is a line Labour uses a lot also, that no one sells profitable or productive assets due to their dividend stream.

This is simply not the case. The best example I can use is Fairfax selling a minority stake in Trade Me. Trade Me is by far the most profitable aspect of the local Fairfax assets. Yet they are selling a minority stake, in order to reduce debt. And you know, when you have just had a credit downgrade is a good time to reduce debt.

Another line Labour uses is that when the dividends are gone, they are gone for ever. Well yes, but when the debt is reduced, the interest on that debt is also gone forever.

National says it is wiser to use cash from selling shares in SOEs rather than increasing debt. But in May’s Budget, Treasury said such a tactic would be close to cash neutral: it would avoid $400 million a year in interest but the government would forgo $300m a year in dividends and retained earnings.

In addition, National has conceded it might have to delay the sales if global market turmoil persists. Treasury said foreign investors are important to the sales to help maximise the return to the government. But the dividend outflow overseas will increase our growing current account deficit and very high net international liabilities, the two chronic NZ weaknesses which worry credit rating agencies the most.

I don’t regard $100m a year as nothing incidentially but even putting that aside, yes a portion of the shares and hence dividend may be overseas based (but I suspect not much as local demand will be very high I am sure), but 100% of the debt is overseas based, and reducing debt will reduce interest payments overseas.

“Mixed ownership” will improve the SOEs performance:

This one can be debated for ever. My view is simple. If you look globally, on average private sector companies significantly out-perform state owned companies. Now let’s us be very clear about this. This does not mean every single private sector company does better than every single state owned company. Of course not. It doesn’t mean that no private sector company never fails and it doesn’t mean that all state owned companies fail. It also doesn’t mean that private sector companies out-perform public sector companies every minute of every day.

But overall companies in private ownership, do better than companies in state ownership. The reason is simple, the directors are appointed by those whose actual money it at risk. Ministers do not lose money if an SOE does badly. Share-holders in private companies do.

Boost the stockmarket: If the NZX attracted more companies and investors, the greater depth and liquidity of the market might slightly lower the cost of capital in New Zealand. But liquidity is concentrated in a small group of big stocks. Thus, adding a handful of partial floats of large SOEs won’t help smaller stock much.

“We think the gains would be modest,” Treasury said.

Worse, the SOE floats would do little to improve investor choices.

The market is already over-represented in electricity stocks thanks to Contact, Transpower, Infratil and Vector. Even the simplest, most prudent portfolio strategy would argue against increasing exposure to the sector.

Umm, Transpower isn’t on the NZX.  Infratil is not just an owner of energy companies but also airports, public transport and property. Likewise Vector has businesses outside the energy sector.

Vector though is a good example of a mixed ownership model. 75.1% owned by AECT and 24.9% private shareholders.

Anyway in summary, here is a rebuttal to Labour’s lies:

1. National is selling our assets – No they’re not, they are proposing to sell minority share-holdings in SOEs while retaining Government control
2. Once an asset is sold it is gone for ever – Nonsense, the shares are openly traded on the NZX – one can buy whatever stake back you may want in future
3. When the assets are gone, the dividends are gone for ever – Dividends will be reduced yes, but the interest on repaid debt will also be gone for ever, and it is likely the interest reduction will be greater than the reduced dividends
4. Electricity prices will go up – This is not the view of the Consumers Institute who has said that NZX listing will not increase prices, and that mixed ownership model will make the SOEs more transparent as they will have to explain their actions to the public
5. Electricity costs $500/year more from the privatised Contact than the SOEs – this is false. Consumer data shows that in most major centres Contact is cheaper than some or all of the SOEs.
6. Power prices will be cheaper under Labour than National – Under Labour the state raked in $3b in dividends and power prices went up 64% or over 20% a term, compared with only 11% in National’s 1st term. Also Labour’s ETS policy will push power prices up quicker.
7. The assets will end up foreign owned – no the Government keeps at least 51%, and no company will be able to own more than 10%. Also New Zealanders will have priority in the initial public offering.
8. National’s policy is extreme – Actually NZ has been the only country in the OECD which has a ban on asset sales or part-sales. They are entirely conventional, and left-wing Governments the world over have done them, as well as right-wing Governments, National’s policy is minor and timid compared to most countries.

Labour would have the public believe that what National is proposing is what Goff and colleagues did in the 1980s. It is not. In the 1980s they sold entire companies to sole often foreign buyers. National’s policy is to sell a minority stake on the NZX.  One can have a truthful debate on the pros and cons of that policy, as Rod Oram has done. But Labour’s advertising is designed to con people into thinking that National is proposing to do what Phil Goff once did, and they are not.