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Asset sales loyalty scheme won't cost taxpayers $1 billion

BUSINESSDESK: The proposed loyalty scheme for retail investors who hold on to shares in part-privatised power companies will reduce the government's take from its asset sales programme by an unspecified sum.

While details of the scheme are unresolved, Prime Minister John Key told his post-Cabinet press conference yesterday afternoon that it was "likely that a portion of the 49% (of the company to be offered to private investors) will apply to the loyalty scheme."

The alternative would be to issue new shares, effectively diluting the value of existing shares, to both the government and private investors in order to maintain the government's controlling shareholder.

Mr Key did not rule out a bonus share split option, but officials are indicating this would be a complex option by comparison.

Australian and British examples of similar loyalty schemes have seen small-scale investors rewarded for holding their shares for an extended period, costing $A360 million in lost revenue for the Queensland government in the case of the sale of the state's railways system.

Mr Key has indicated that small-scale investors would need to hold their shares for as much as three years before qualifying for the bonus top-up, which is being offered as a sweetener to encourage retail investor participation in the otherwise unpopular share floats.

He scoffed at Labour Party suggestions the loyalty scheme could cost as much as a billion dollars, given that the total value of the 49% stake in the first power company to be offered, Mighty River Power, was valued at around $1.5 billion and the loyalty shares would be a small portion of that.

Trying to pressure Mr Key into revealing more sale details yesterday, Labour leader David Shearer warned of a potential cost of $1 billion from the bonus scheme.

Greens co-leader Russel Norman also warned that taxpayers would pay for it.

"The retail syndicate will be a much smaller proportion," Mr Key said. "There will be some cost, but it's an investment worth making. Labour's argument is that we are being irresponsible encouraging to invest in a company like Mighty River Power."

Mr Key's comments mirror a marked shift in government rhetoric on the reason for the asset sales, which were initially defended as to way control government debt and to fund new public infrastructure.

However, with the sales approaching and the details of offers available for small and first-time investors emerging, the government is increasingly talking up the programme as a way to spur a savings culture among New Zealanders, based on more than the traditional preference for bank deposits and residential property.

Comments and questions

Back to school Mr Shearer. Do the math:

> $7bn with 1 in 12 loyalty shares gives a max exposure of $583m
> Assume ~75% retail. Now $438m
> Assume ~75% of retail holds their shares for 3 years. Now $328m

Only ~70% off. Wouldn't want to let the facts get in way of a good story though would we?

Thanks for clearing that up for us, the Government is only going to spend around $327 million on subsidies.

Yes exactly. A mere $328 million more thrown away to try and guarantee the success of the float. Peanuts eh?

Just pointing out the failings of the Labour argument...

A question for the red and green. If you introduce a loyalty bonus to increase demand, what impact should this theoretically have on the price?

To much assuming for accuracy. You do the math when you have the correct data in front of you.

The Government spends close to $700 million on Kiwisaver subsidies - EVERY year, and not just a one off, as in this case. If encouraging private savings at a cost to the taxpayer is good thing, then surely encouraging private investment at a cost to the taxpayer is also a good thing. Labour, the Greens and the others opposed to partial privatisation can't have it both ways.

I will tell you what is a good thing is Lindsay. A good thing is keeping assets that every year pay a substantial dividend to the government (so negating the need to raise taxes from elsewhere). A good thing is not trying to flog NZ taxpayers something they already own. A good thing is keeping public control of strategic industries in a world in which resources such as power are of ever increasing importance. These are all good things - and the reasons why I will never ever vote National again.

Kiwi saver subsidies may or may not be a good thing.
Subsidies on asset sales may or may not be a good thing.

They are very different schemes.
To say subsidies on assets sales must be a good idea if Kiwi saver subsidies are a good idea, is hardy rational.
One can be good while the other is bad.

I agree it is back to school, but also think you are way too optimistic in respect of retail investors stumping up 75% of the float. In fact would be interested in a brokers view with the benefit of hindsight on Contact and Vector.

At 25%, the possible loss of equity cash coming into the Gov coffers is one third your $328, and that is $110M (excuse the rounding). For the the positive outcome a very small sum to pay, heavens they could save more than that by simply squeezing the Banks and Brokers fee for effectively doing very little.

Labout and The Greens are a bunch of finance no hopers, worse still they dress up Welfare as a productive passtime.

Is BusinessDesk the new press arm of the Labour Party/Green Party? This is poorly written and uses biased language.

Redqueen how would you write this article in a non-biased way?

How would you include the fact that the National Government has decided to reject the sale of these assets on a free and open market, for maximum price, and has instead decided to introduce subsidies?

Damn Labour and the Greens who do they think they are voicing the opinion of Treasury!?

The subsidies would “typically range from 5 to 10 per cent of total value ($250 million to $500 million based on a $5 billion programme)” (from Treasury report to Cabinet).

P.S. The Govt expects to get $5 billion to $7 billion from the sales.

I hardly think that Treasury making guesses well in advance before any sweetener scheme has been fully developed should be given more than passing note.

The numbers discussed are only the gross, not net, economic consequences of the sweetener. Any such move that then increases demand (and tightens the availability of shares to institutional investors) must have a consequence on the final pricing, so it would not be unreasonable to assume that this type of mechanism would increase the sale price to begin with. Then there is the matter of dividends received by the Crown on the reserve shares, plus the potential for reserve shares not called upon (because the investors sold early) to be sold onto the market at higher prices. So if, for example, the price were to rise early on as institutional/overseas investors tired to top up their holdings, and some small investors decide to take the profits, that would quickly free up a proportion of the reserve shares for sale at higher prices.

From the perspective of both trying to maximise price and encourage as many small kiwi investors to buy and to hold the shares, the sweetener bonus makes a lot of sense. The numbers being bandied about are used in isolation, not taking all factors into account, rendering them meaningless.

I've got news for you all - the flotation will get postponed because of market turmoil which is coming right up. They wont be able to get the issue away at anything like a reasonable price and will have to pull the whole thing.

Couldn’t trust Labour’s financial figures as far you could carry or throw Horomia.

Strewth – Labour still aren’t really sure who they want for a leader, so how on earth can the public be confident in their “crystal ball gazing” financial analysis?

For inspiration on Labour, their credibility and ethics – I look across the ditch at what Aussie are dealing with – theft, cronyism and blatant rorting.

Then I ask myself, would the NZ Labour party in collusion with the unions here be capable of being the same… and then I wonder how ACC paid the unions Millions for “training initiatives” (that have delivered sweet FA) by a Labour government.

I just can’t understand why the authorities aren’t looking for fire with all the smoke?

Birds of a feather…

Oh Solidarity we wouldn’t want to talk about the issue at hand now would we, so let’s talk about something else.

Well - it's just that Labour don't have any credibility at all - so why should anyone listen to their bumbling incompetence? Or take what they say with any respect?

After the best 9 years NZ ever had - Labour completely f**ked it up for NZ Inc with the ousted Cullen scoffing at leaving the financial coffers drained with nearly $1Billion in liabilities not accounted for - so for Labour to now suddenly have "financial credibility" with all their murky, hidden "related party" financial goings on with the unions...

I don't think so!

It's like the unions claiming they improve workplace relations - where as the truth of the matter is, the only places that ever have troubles are where the unions are at. Guess what the common denominator is?

It's a case of the pox posing as the cure attempting to swindle the populace with snakeoil sales speeches as they attempt to climb on a soap box so they have a venue to spew forth their financial ignorance and deliberate lies and obfuscation.

If Labour keep going on as they do, the Mana Party will have more credibility than them - bwahhaaha! Now that's a friggin' joke!

We could spend hours debating just how evil Labour is, but that is not the point, Labour isn’t in power, it’s National that is making policy. So the question is how good is that policy? And you don’t appear to want to contribute to that discussion.

"There will be some cost, but it's an investment worth making. Labour's argument is that we are being irresponsible encouraging to invest in a company like Mighty River Power."
"some cost"
Pull the other leg Mr Key. Are you trying to tell me that your bean counters are not are not going to factor the floating/sweetener costs shares into the issue?
mmmmm I like your sense of humour, but you ain't fooling me. Now just get on and float the blinking thing.

I can't believe all these clowns haven't taken on board your simple and accurate observation yesterday.

49% of the company is worth the same however the share issue is structured. In principle the bonus shares won't cost the taxpayer a cent since the original issue will be at a higher price.

Doh, indeed.

Probably not quite right. People won't bid the full subsidy because there is uncertainty they will receive it.

That said, it's definitely less than the calculation in comment 1, but it does introduce inefficiencies to the price setting process so will be more than zero.

Agreed. Risk has a cost. We can blame Labour and the Greens entirely for creating it.

A useful point, and one worth thinking on further. The bonus shares will carry in the money call option value, with expected dividends the major value adjustment. Any rational investor selling rather than waiting for the bonus shares will need to factor the option value foregone.

Of course the fundamental issue with this in terms of the net revenue to the crown (aka the taxpayer) is that while in a perfect world value and price might be the same, in the real world they are not. A well designed sale process will "fiddle" with both supply and demand to create better outcomes, and that certainly looks like the kind of thinking going on here.

Hi Alan, my thinking is; "these clowns" real motive is to spook the electorate away from the Nats at the next election. I do not believe they have any interest (& you might argue, "nor the wit") to contribute to an intelligent debate on the fiscal advantages/disadvantages for NZ.

I've no disagreement with that, John. Self-interest to the exclusion of national interest certainly - but mixed with a large chunk of incompetence.

Yesterdays comments from Shearer and Norman demonstrate yet again their fragile, if any, grasp of Finance and Economics. God forbid that they are ever let near the Treasurey benches.

Hey Mr Shearer, Labour is well-versed on the creation of loyalty schemes- remember the surprise introduction of interest-free student loans by the Labour Government prior to the election they won a few years back ?. Certainly got the loyalty of student voters locked in for an election win didn't it ..... that scheme has cost NZ a fortune. Labour talks the language of envy and jealosy rather than self-reliance and progress.

It's all misdirection.

The money is being made through 'the sale process' - neither by the goverment nor by individuals who will own a few shares.

Whilst we argue about whther to, or whether not to, sell or have bonus shares we don't look at the major scam.

It's an old trick.

Whichever way you look at it the country is stuffed by white collar smoothies

What concrete measures are in place to check Len Brown's Amitai Etzioni style Communitarianism i.e. a synthesis of corporatism (Serco style) and socialism. Local government is the soft vulnerable underbelly for all kinds of international treaty sourced (Agenda 21) interference in sovereign Kiwi affairs such as high density housing, restrictions on where to live, work and play over the next few years and what we can no longer do if we own a rural property.

I note that Jim Diers from Seattle is going to be in NZ in August teaching Asset Based Community Development to Auckland Super City staff and local sustainable neighbourhood groups. He's great at creating fractious communities!

Why is Auckland Council using ratepayers money to get a self-confessed Alinsky-community organiser to teach Council how to set up sock-puppet 'faux' community groups with Auckland Council facilitators leading same to a preordained consensus in 'what needs to be done in our community'. This Delphi technique manufactured consensus stuff is really rearing it's head in Auckland at the moment. One suspects that Penny Hulse's former position at Waitakere Council, where they signed an MOU with ICLEI, is one reason.

Given ABCD is all about high density housing, sock puppet community groups and ultimately an attack on single family neighbourhoods and homes why are we allowing Auckland Council to use our rates to consult with those who are against us.

Good to see a National Government protecting us from the Internationalist enrtyists in local government!

Asset sales loyalty scheme won't cost taxpayers $1 billion?

Probably not. But, the Emissions tax scam, the money stolen to and the sick elephant in the room with the Power shares affordability mantra, has already cost over a $ 1 billion. Where is Shearer and Shonkey on this one?

It will be very interesting to see how many people take up shares in these company sell downs, from all the noise that is being made, one is led to believe that these share sell off's won't be sought after at all, because nobody want's it to succeed, for starters every Maori in NZ will not subscribe into them, nor will the "Greenies" and 98% of Labour supporters won't subscribe to the share placements either, so it is going to be very interesting when it goes ahead.
Plus for starters, why would anyone take up shares in any business, who is inturn going to screw the living daylights out of the people who buy the product that these companies trade in, because man alive are power prices going to increase big time, to provide the shareholder owners with an investment return, after the Govt has creamed them for taxes and GST to begin with, and the only way to increase the returns is to increase the prices, just like the big red sheds and food supermarkets have done.
Perhaps the best thing to do is to boycott the share placements, because we are going to get screwed!!!! big time people.

"and 98% of Labour supporters won't subscribe"
That statement is daft.
I do think that labour supporters are, in the main, very intelligent, but I do not believe the majority are that stupid.

Want to have a bet on that,,,most of them have have honours letters on the end of their names like QSM or in this case WINZ get real John..

Wouldnt it be better for the NZ Government to issue A & B Class shares? A class with voting rights for nz resident citizens and B class for overseas investors with no voting rights. Plenty of other companies the world over float on this basis.

This would ensure:

1. NZ remain in control of these strategic assets.
2. There wont be the monopoly type practise of price gouging, because who sh*ts in their own nest.
3. This would provide NZers a investment for now and the future. Isn't this what Key says is his primary motive?
4. This would discourage short term overseas speculation. By short term I mean anything less than 5 to 7 years.

These different classes of shares make sense to me. One suspects Jonkey is working for his previous masters (overseas interests), and just a salesman. This is why you wont see these different classes of shares in this float.

Hopefully someone from another political party will take this up and run with it. Its very difficult to argue against this idea, especially when Jonkey has indicated boosting the local sharemarket and investment for locals is his primary objective.

Labour really do need to get some better financial advice, before they shoot their month. However, if National start acting in the interests of NZinc instead of overseas interests, I might consider voting for them.