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NZ presents some of the most alluring property in the Western World; particularly given the greater easy of residency, the low cost of property, and the liveability of the country. In addition, there is no capital gains tax, transfer taxes, VAT/GST or wealth taxes in NZ, so rest assured that NZ property is tax-effective! Learn more now!

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Wednesday, January 25, 2012

Kiwis - a boat problem

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This is one of the more amusing stories to come out in NZ. It seems there is a 'Kiwi boat people' issue, as well as 'fly-by-night' Kiwis coming into Australia. Yes, a Kiwi resident multimillionaire has exposed to risk to Australia of people coming to Australia by boat or plane. Presumably these are low-flying planes which fly from the West Coast of NZ to some private 'bush' airport in Australia. It seems equally plausible that such avenues might be used for drugs into Australia....the implication being that NZ is a 'weak link' in Australia's border protection.
This issue comes to hand because of the Kim Dotcom fiasco. Australia seems more concerned about the influx of Arabs. Do we have a problem on our 'rear flank'...it would seem so. If we don't control the 'Kiwi situation', we might never stop them. :) These birds were flying when they left Australia. Some 50mil years after....they are flying back. You can't question their judgement...this Australia Day!

Friday, January 13, 2012

Wanganui: Small town thinking for big town problem

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NZ residents of Wanganui are being asked whether they ought to approve a $141 million flood mitigation plan - a huge cost burden for a depopulating town, when there is a far more prudent and lucrative opportunity - build a hydro-electric scheme. My thoughts posted at Wanganui Chronicle letters below:
How about a flood mitigation scheme upriver to avoid the prospect of a flood and generate hydro-electricity for a century for free. Maybe the city could get free electricity, to offset the extortion by the power companies after stage 2 of the privatisation/self-regulation. Perhaps the council could finance the scheme through its EnergyDirect investment (50% owned by the council)....though maybe self-regulation precludes such vertical integration. I forget.
I might add - a few greenies might be flooded out of the valley at the same time. Seriously, though, why spend $141.4 million on remedial work when you can create something of value or productive, that ultimately serves 2 purposes, perhaps 3 (water supply in times of drought).
This of course is too abstract for councils accustomed to reactionary solutions. Why spend on costs when you can create assets. Of course Annette Main, whose property lies in this vicinity could be expected to have a vested interest, so maybe no progress will be made. Perhaps she needs to keep a back seat in our extortion-based political system.

Think about the following figures - electricity prices in NZ - page 148 of the Ministry of Development website. Comparing the ratio of residential electricity prices / industrial electricity prices - suggests a 2.5x premium for residential consumers over bulk electricity consumers. Its the worst ratio in the world...then look at the same ratio for gas...its even worse 4.8x - so consumers are being ripped off by producers and distributors of gas and electricity despite the capital cost of these assets being fully sunk by govt by the 1980s, and no fuel cost for the 70% of generating capacity which is hydro.
Perhaps rate payers ought to convince the council to 'invest' in new generating capacity rather than spending on 'damage prevention'....that's a rather expensive contingency planning 'cost' for an event that may not occur; protection which might not work; and work that offers no improvement. Perhaps council could even protect ratepayers from the extortionate prices of the national powerco's by offering ratepayers a cost+ROI electricity price; or better still adopt market pricing, and retain the power asset revenue to alleviate future rates. Concessional electricity prices could also be used to attract new industries. You wanted jobs didn't you. Cheap electricity is known to attract jobs. But will you allow a dam on the Wanganui River?? If it protects your homes?

Am I missing something?

Wednesday, January 4, 2012

The case for privatising NZ electricity assets

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According to the NZ Herald, Ernst and Young has produced a report which suggests NZ state-owned assets are reaping high returns; in fact higher returns than the median for private sector businesses. This poses a case of – why sell – when the public enterprises are more profitable, and the government has a lower ‘risk-free’ cost of capital than the private sector. There are problems with this analysis:

1. The fact that electricity assets are making huge earnings can actually be a good time to sell. The problem is that they are doing so because they are able to extort higher profits from the public because of poorly conceived self-regulatory electricity market. The NZEM is self-run and designed with private companies in mind. The implication is that these assets in private hands would lead to very high electricity prices, and either a lot of complaints by investors to re-regulate, or the high cost option of the govt buying back these assets. Think ahead NZ!

2. NZ’s economy is not growing, so you might reasonably expect these generators to use their market power to extract or ‘extort’ higher earnings from higher prices…because its not a competitive market, and the option-incentive for CEOs will be similarly driving all CEOs to make the same decision. The problem is CEOs have an expectation of driving higher profits. They can’t do that in NZ…so why are they not going overseas? Because they are too small, so hard to make profits. Most companies who invest abroad lose money.

3. Hydro-electricity assets are strategically important because no other substantial hydroelectric dams will be permitted by an ‘environmentally conscious’ NZ population. Hard to imagine any new dams being justified. More likely higher-cost wind capacity because its incremental, particularly with new molten-salt solar storage plants being under development. Expect solar wind farms around Nelson and greater island inter-connection.

4. There is a big overhang in the electricity market – the prospect of Rio Tinto not finding a buyer for their aluminium smelter, or the prospect of its closure in the next 5 years. This will result in 13% of NZ’s electricity demand ceasing to exist, so there is really no new demand for electricity in the short term. That means higher electricity prices on existing assets to justify lower sales. CEO’s will be forced to raise prices (since they can) to get higher salaries.

5. This of course underpins the ‘incentivisation’ idea of John Key. The idea that market discipline and ingenuity is going to see these CEOs extract higher returns. They will – but by mostly rising prices. Running a hydro plant is not rocket science!

The solution is to not sell hydroelectric power assets – except Solid Energy – which is a thermal project. The market is not a legitimately fair market regime, and the assets are politically sensitive in the sense that electricity costs are important for NZ’ers. If NZ wants to be competitive, this is not the way to go for small business or consumers. Next you will have to raise welfare benefits to adjust for higher electricity prices. It is really a hidden form of taxation. I’ve seen it all before in Australia.

“Labour says the Government delayed the release of the report until after Parliament rose for the holidays because it knew it undermined the economic case for partial privatisation”.[i]

Probably true; but then the Labour Party was too dumb to actually raise these concerns anyway. The argument was always there to be made, with or without the Ernst & Young analysis. In fact, I have made the case on Facebook, to the Labour member for Wanganui, and on my blogs. Doesn’t the Labour Party do its research? No, they seem to rely on policy from the top….and its all political ‘reactionary’ rhetoric. There are no analysts in the party…all party bureaucrats relying on analysis by government bureaucrats.

The fact that Mighty River earned a yield of 8.2% on its investment of course does not mean the asset will be sold for $3.5billion. However the fact that it’s a “no-growth” asset in terms of limited potential to build more dams because of environmental risks, and planning objections to wind farms, means any new capacity is high-initial-cost, but there is no population growth anyway. CEOs need incentives to stay in the job. You need to be sure there is no option incentive for CEOs to extort higher profits.

The problem I find is that NZ needs to have an intellectual debate about the values of this country. Either this is a socialist paradise or it’s a market economy. If you are looking at a ‘market economy’, then you need to look at foreign markets or increasing immigration. If you are looking at immigration, then it has to be significant volume to achieve growth in profits and asset values. That is what will retain people, and stop their movement abroad. This of course means NZ’ers need to come to terms with a NZ with a different cultural identity…this is the problem…most older NZ’ers don’t want this, so NZ is destined to remain a welfare state, with high costs and low-value opportunities.

Prime Minister John Key said the companies would "reap the benefits of sharper commercial disciplines, more transparency and greater external oversight".[ii]

Sorry, but this is not going to happen in a privatised market. Higher prices is what you can expect as the political pressures for lower prices evaporate. Greater external oversight? I doubt it. After privatising – the government is going to change the market structure? I doubt concerns about sovereign risk will allow it, and if the buyers are American, the FTA agreement will not allow it, i.e. They will sue the NZ govt. Of course if these assets are sold, then investors who retain these stocks will pay. My advice is take a stag ‘traders’ profit on these assets. Foreigners will not be interested in them. Too much sovereign risk.

“Ernst & Young's report shows the three companies have performed well compared to their private sector counterparts”. [iv]

That is because you are not comparing ‘like-with-like’. Other businesses can sell assets abroad. Australian power companies are servicing growth markets. You need to keep the context. When you buy a house in ‘no growth’ Wanganui, you expect a higher yield than ‘growing’ Auckland, i.e. Wanganui 12-13%, Auckland 5-6%. That is life, so expect 12% from these power assets; but these CEOs will push it higher to get an incentive bonus, so be very careful how the boards of these enterprises incentivise their executives.

Labour finance spokesman David Parker said the state-owned power companies' strong performance was "no surprise to me….This is further proof that these companies are already well run and profitable, and that they're not going to be better run as a consequence of private ownership…It further underscores that the only way these companies are going to make more money substantially is by increasing prices”. [vi]

True enough….but I suspect he does not know the reason why. It’s not because the yield is high or they are particularly well-run; it’s because they have the power to raise prices.

A recession and a self-regulated market context are not the right time to sell power assets. By all means sell Air NZ and Solid Energy, but again first eliminate the spectre of a 'carbon tax', as that nonsense science will only undervalue the Solid Energy assets. Empirical science is a scam. These scientists don't really understand their methodology. Such is the quality of public education. The biggest problem is the lack of critical thinking taught in our schools - public or 'religious dogma' inspired private schools. Privatise public schools by all means - but first discover rationality.


[i] “Government’s sell off-firms are top performers” by Adam Bennett, NZ Herald, website, Jan 5, 2012.

[ii] “Government’s sell off-firms are top performers” by Adam Bennett, NZ Herald, website, Jan 5, 2012.

[iv] “Government’s sell off-firms are top performers” by Adam Bennett, NZ Herald, website, Jan 5, 2012.

[vi] “Government’s sell off-firms are top performers” by Adam Bennett, NZ Herald, website, Jan 5, 2012.

'Buying NZ Property – Download the free sample readings!

NZ presents some of the most alluring property in the Western World; particularly given the greater easy of residency, the low cost of property, and the liveability of the country. In addition, there is no capital gains tax, transfer taxes, VAT/GST or wealth taxes in NZ, so rest assured that NZ property is tax-effective! Learn more now!

New Zealand Property Report 2010 - Download the table of contents or buy this 180-page report at our online store for just $US19.95.

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