Opinion & Analysis
OPINION: The Key government, flush from its re-election victory, launched its SOE sales in its Throne Speech on December 21, 2011. It said the floats would achieve three big goals: They would strengthen the Government's balance sheet, improve the performance of the companies, and attract investors to the stock market.
With the referendum on the sales closing on Friday, here is a report card on these three planks of the Government's flagship economic policy.
The balance sheet: The Government said the sales proceeds would reduce its borrowing for infrastructure such as schools and hospitals. In accounting terms, though, the Government is reducing both assets and borrowing, so the net impact is negligible.
It is also getting less money than it hoped. Even if it manages to sell Genesis Energy next year, its latest midpoint estimate of theproceeds is $4.8bn, down 25 per cent from the $6.1bn in the Budget in May.
Worse, it is selling income-producing assets and reinvesting in non-income producing assets. Treasury estimates forgone dividends over the next five years will be $810m, while interest costs will be reduced by $780m. So the Government will be $30m worse off over five years because of the floats.
The full negative financial impact is much higher when other factors such as the cost of the sales and the Government's reduced share in the SOEs profits are factored into the Government's accounts.
The Government estimated the sales' cost at a maximum of 2 per cent of the floated companies' revenues. It is running at double that for the first two floats, even on their barebones costs. The Greens estimate the true cost is double again, at around $250m for Mighty River Power and Meridian.
Moreover, while the Government claims fiscal prudence on SOE sales, it is fiscally irresponsible elsewhere. For example, it announced this week that it will award the Transmission Gully motorway Public Private Partnership to a consortium funded by the Bank of Tokyo-Mitsubishi. The base cost of building the motorway is $900m. But thanks to the PPP funding mechanism, the consortium will receive $3.12bn from taxpayers over the 25-year contract. Even using the Government's traffic forecasts, which are excessively optimistic based on trends and other analysis, the cost works out at a taxpayer subsidy of $15 per vehicle per trip over the next 25 years.
The companies: All companies make the best case they can to investors when they come to market. MRP and Meridian were no exceptions. Their prospectuses, signed off by their boards and the Government, gave rather neutral views on falling demand, competing new technologies such as photovoltaics, intensifying retail competition and Labour-Greens' plans to cut wholesale prices if they form a government.
Analysts and brokers were equally sanguine. They considered these were all distant risks with limited impact on their near-term valuations of the companies. Yet, these factors will reduce the ability of the power companies to pay rich dividends, the very virtue on which they sold them to investors.
A much more realistic analysis of the electricity sector's challenges is offered by PwC. These are worldwide trends, the global consultancy firm says in its latest annual report on the sector. PwC NZ has produced a version focused on their local impact, available at http://pwc.to/1aAbdsS.
The electricity companies have piled on retail, PR and investor relations staff to cope with the retail market and the attention of stock market investors.
But they have limited hope of growing their businesses. They won't be investing in new generating capacity here, given the sector's excess capacity. Of the three electricity generators only MRP has ambitions overseas, and those are limited.
Thus, they are likely in coming years to have excess capital, returning it to shareholders via share buybacks. This is the complete opposite of the Government's rationale that the SOE floats will help those companies raise capital.
Treasury analysis before the floats concluded their was no evidence that the SOEs were less well run than their private sector competitors, Contact and TrustPower. Again, this contradicted the Government's claim the SOEs would be run better if they were sharemarket-owned.
The Government also says Solid Energy's destruction is evidence that companies are better run by the private sector. In fact the issue is the competence of the owner, not which sector it's in.
For example, Temasek, the conglomerate owned by the Singapore Government, has S$215bn ($210bn) of assets in airlines, telcos and financial services and is a leader in the country's big strategic push into biotechnology and life sciences. Since it was founded in 1975, it has delivered an average annual 16 per cent total shareholder return for the citizens of Singapore.
The stock market: The Bolger government's sale of Contact in 1999 attracted 225,000 retail investors. Treasury hoped MRP would attract the same number, but only 113,000 stumped up. Only 62,000 bought Meridian shares despite the bargain price, instalment payment and big dividend; of those, only 16,000 were new investors.
The shares of MRP, Meridian and Air New Zealand are all trading below their float prices. Brokers and analysts explain away the falls, saying the Government was too greedy and badly advised, the market is now pricing in bigger political and economic risks, and the NZX 50 is now heavily overweight in electricity stocks.
It's a shame they were so smart a few months ago. But, heck, they've moved on. They say defensive, high yielding stocks are yesterday's story. Today everybody wants growth stocks. Into this market, the Government will attempt to sell Genesis next year.
Since the Government announced the SOE floats two years ago, the NZX 50 has risen by 48 per cent. Over the same time, the existing electricity stocks, Contact and TrustPower, have fallen 11 per cent and 7.5 per cent respectively, with a lot of the turmoil created by the SOE floats.
This has wiped $505m from their combined market cap. If they had merely tracked the market, they would be worth $3.4bn more. On top of that, investors in the three SOE floats so far have lost $720m.
The referendum is a chance to let the Government know what you think of its flagship economic policy.
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