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.
