The harder John Key tries to sell voters on reducing Crown ownership of five state-owned enterprises (SOEs), the deeper the hole he digs for himself and National. Here are the main arguments. None stack up.
Investing in NZ's future: 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.
When it comes to reinvesting in productive assets, National has suggested three so far: Kiwibank deserves more capital to grow but it will be years before its market share and thus the return to the government matures; broadband but its return is even more uncertain and distant; and irrigation projects which would yield in aggregate a return of only 6.4%, a NZ Institute of Economic Research report said.
Fiscal prudence: 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.
"Mixed ownership" will improve the SOEs performance: "We're trying to replicate the Air NZ model for power companies," Key has said. But the airline's success has nothing to do with the fact 26.2% of the company's shares are stockmarket-listed.
It is an excellent company now because the Clark government invested $1b in it in 2001 to bail it out of bankruptcy, put in place the right board and management, and because the government was a wise, supportive owner as the airline invested billions in new aircraft, products and services.
The Crown has got some reward along the way in the form of $446m in dividends. But the share price today has dropped back to close to the rescue price of 10 years ago because the aviation sector is a notoriously poor and volatile profit earner. By far the biggest reward from Air NZ's success accrues to the country as a whole through its growing flight schedule, commitment to innovation and NZ design and branding, and its high standing in the global aviation industry. If a National-led government offers you shares in Air NZ, run a mile.
As Warren Buffet of the United States, arguably the world's greatest investor, noted after his bruising involvement in USAir in the 1980s: "The money that had been made since the dawn of aviation by all of this country's airline companies was zero."
Air NZ says it is not capital constrained. It can fund all the new aircraft it needs through leases and cash flow. So if you want to give it your full support, buy its tickets not its shares.
As for other SOEs, "there is little evidence to suggest privatisation would significantly improve the financial performance of many of the SOE companies", Treasury concluded last year. Moreover, Treasury noted, the electricity generators have had the money to invest in sufficient new generating capacity. The SOEs are enterprising. Meridian Energy, for example, invested profitably in hydro generation in Australia, paying a $600m special dividend to the Crown when it sold.
Comparing SOEs with Contact Energy and Trustpower, the two power companies already on the stock exchange, found no conclusive evidence of under-performance of the SOEs, Treasury said.
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.
If the government were serious about helping the NZX develop, it would deliver on all the recommendations of the capital markets development taskforce.
The taskforce said the most important remedies were to increase the household savings rate and remove tax distortions and other regulatory impediments.
So, given the economics of SOE sales are so poor and the politics so unpalatable, judging by voter resistance expressed in the polls, it remains a mystery why Key is exercising such bad economic and political judgement.
- © Fairfax NZ News
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