Acid test of asset sales is who buys them

20:57, Jun 22 2012

Australia's Labor Government is weighed down by billions of dollars of debt. It has suffered a credit downgrade.

It cooks up a plan for a historically huge selldown of shares in a key piece of infrastructure, aimed at curbing debt while keeping up capital investment.

As part of the process, it offers a loyalty bonus for local retail investors who hold on to the shares for a year. A cool $5.86billion is raised from the sale.

Two years later – after struggling through the early stages of recovery from the worst natural disaster in living memory – the Government is spectacularly bundled out of office after an election campaign marked by controversy over the asset sales.

The disastrous tale of the Anna Bligh administration in Queensland has not gone unnoticed by the National Party in New Zealand.

But it's only the asset swap for debt control and loyalty scheme parts of the story that National hopes to emulate.


"Over time, as [voters] get to see the merits of the overall programme and recognise what the Government is trying to do ... then I think that they will warm to that," Prime Minister John Key says.

"It'll take some time, but I think we will get there."

As in Queensland, there are several legs to the Government's argument for partial asset sales.

The first and probably the most persuasive with the public is about debt.

From around $10b when the Government took office in 2008, net debt has climbed year after year to more than $40b in 2010-11. It is forecast to continue up to $70.7b in 2015-16.

Without the $5b to $7b expected to be collected from the partial asset sales programme – the argument goes – you could expect roughly that much more to be added to the debt bill.

Naturally, the less the Government owes the world, the better.

All borrowing has to be paid back with interest, and since the private sector has extremely high rates of debt by international standards, New Zealand is particularly vulnerable to hypersensitive lenders suddenly demanding much higher interest rates or flat-out refusing to lend.

We don't want that – things would be much, much worse if that happened.

But how much difference will a few billion less really make, in the context of $70b?

Berl's chief economist, Ganesh Nana, says the asset sales programme does nothing at all for Crown debt. That is because when the assets are privatised, so too are the dividends, which means less revenue for the Government.

The proceeds from the sales may cover or exceed the loss of dividends (there is much debate about that) but the proceeds will not be spent on paying off debt. Instead, the money will go towards funding new capital projects.

Those projects – things such as new schools and roads – won't start delivering economic returns until some years later. The dividends, on the other hand, shrink immediately.

Mr Nana concludes: "The interim loss of earnings resulting from reduced dividends and the period of time before the new assets reap benefits is never recouped."

Timing aside, Labour insists the foregone dividends are, anyway, greater than the borrowing costs saved.

It has repeatedly charged that the Treasury has built in continued dividends from the assets in their forecasts, despite also banking the cash from their sale in the same projections.

The Treasury, however, says critics have confused foregone profits with foregone dividends. In fact, the foregone dividends are $66 million less than the reduced interest payments, it says.

Questions have also been raised about the costs of the sales process. Finance Minister Bill English has accepted that something like $120m will be spent on fees for organising and marketing the floats.

But there are also unspecified amounts to be stripped out of the value of the assets from loyalty schemes, just like those used for the Queensland Rail float.

A discount on shares is unlikely, but a loyalty scheme of some sort is almost certain in the Mighty River Power offer.

Green Party co-leader Russel Norman has bandied about $400m as a possible price tag for loyalty schemes for all four energy companies and the further selldown of Air New Zealand.

Mr Key has shrugged that off, saying even a back-of-the-envelope calculation makes nonsense of it. Dr Norman's estimate assumes every share sold in all five of the companies will be subject to a one-for-15 bonus scheme.

However, only Mighty River Power may be subject to such a scheme and only Kiwi retail investors, who may get less than half of the shares, will get the bonus.

Even $50m spent on a loyalty scheme, however, might be a waste of money, according to investment analyst Brian Gaynor.

Mr Gaynor's Milford Asset Management runs a KiwiSaver fund, which he readily admits exposes him to accusations of self-interest.

But he is certain the Government would do better ring-fencing a proportion of shares for institutions such as KiwiSaver funds like his, other New Zealand institutional investors and retail buyers with or without brokers.

"They're long-term assets and KiwiSaver is a long-term investment prospect. They're a completely perfect match and they should be making sure that a lot of these shares go to KiwiSaver funds," he says.

Loyalty schemes will only have an impact for the life of the scheme – two or three years – before investors flick the shares off, often overseas.

Besides the economic arguments for keeping the shares in Kiwi hands, Mr Gaynor stresses the significance, to the level of public support for the sales, of who buys and keeps the shares.

"The biggest thing for me with privatisation is who you sell the shares to," he says.

"That's why there is so much opposition in New Zealand... The opposition has occurred mainly because of who we sold them to, that has actually caused all the strife."

Hundreds of submissions to the select committee on the bill cited issues relating to foreign ownership.

A typical comment was: "Partial privatisation is an inevitable prelude to full privatisation and foreign ownership of our energy companies. That will mean high power prices, dividends flowing overseas, and fewer jobs."

Mr Gaynor says a more concerted effort to explain exactly who will buy the shares and how would have gone some way to soothing such concerns.

Instead, Mr English can only offer a target of 85 to 90 per cent New Zealand ownership – and that only applies when the float takes place. "We don't have the capacity to enforce [the target] beyond the float."

Political opponents have also seized on the tenuous state of the global economy as a risk to the price the assets will attract.

Air New Zealand chief executive Rob Fyfe says he would be surprised if the Government sold down some of its 73 per cent shareholding in Air New Zealand while the price was so low.

But it is one of the better performing airlines in a sector plumbing the depths of what is widely regarded as a cyclical trough; its share price should eventually recover.

The energy companies are a much more attractive proposition to investors right now.

"Electricity is very stable: people don't turn off electricity; they will make electricity a priority before they buy their next bottle of wine or before they go to the movies," Mr Gaynor says.

If Mighty River Power's price is on the upside and Genesis Energy follows with a solid showing, the Government could be marching towards the 2014 election with close to $3b in the bank from the sales and tens of thousands of happy new share-holders.

It would also be able to start rolling out some spending from the programme – Mr Key would be delighted to put things right with parents upset over the botched class-size-changes policy by turning up to open a few dozen new school gymnasiums during the election campaign.

Labour, meanwhile, will continually face the charge from Mr Key that it must promise to buy back the assets if it is against the programme.

NZ First has accepted the challenge – leader Winston Peters says he'll push for a buyback at no more than what was paid by investors. But – barring a catastrophically disastrous sales process – it will never happen.

David Shearer says Labour would "absolutely" stop the sale of any more assets if it took office in 2014, but it will not promise to buy them back.

KiwiRail and a large chunk of Air New Zealand were bought back by the last Labour government in very different economic times, he says.

"If the sale went absolutely disastrously and it threatened the energy supply of New Zealand, then obviously the Government would have to step in in some way.

"But even then, I don't know if it would be possible to do it anyway. I think that New Zealanders have to accept the worst scenario which is, once they are gone, they are gone."

The Dominion Post