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SOE selldown won’t make us wealthy

HIDESIGHT

“The government is committed to reviewing all of its businesses to establish whether continued Crown ownership is justified. It will transfer into private ownership business that will perform better within the framework of market disciplines.”

Those two brief sentences highlight how far New Zealand's political thinking has slipped.

They are from National's 1991 Budget.

Fast forward 21 years, and the country's political apparatus is bent out of shape over selling down a 49% stake in four state-owned enterprises. The average punter couldn't name the SOEs. That same punter also couldn't tell you whether their power was generated and retailed by a government-owned outfit or a fully privatised one.

That punter is me. I had to look up the SOEs that are for part sale. I then had to check whether my retailer was one of them. Imagine my pleasure to discover that Contact Energy supplies my electricity and gas, and was privatised long ago.

It gave me quite the warm feeling.

But clearly I'm the exception.

The John Key-led government is pushing the limit of political acceptance selling just a bit of a few SOEs. That's after winning a mandate to do so and confronting an opposition that have yet to hit their straps. It's extraordinary.

The government has been forced to make a virtue of retaining government control. But that's a big downside.

The share price will be discounted because government remains in control. The power companies will be a safe investment but not an exciting one. No private investor can gain control to effect the changes needed to enhance the power companies' performance and value.

The government has also had to surrender the argument put in 1991 that privatisation is good for the economy. Today's argument is all about the government's balance sheet. Debt's running up, we must sell some assets.

Adam Smith dealt with this years ago. Good policy is not what makes the government rich. It's what makes the nation wealthy. That was well understood in the 1991 Budget.

The policy question should always be would people be better off with the business owned by the state or privately owned? The answer should be the same irrespective of the state of the government books. The foremost concern should always be the health and wealth of the people, not the government.

So we have a bunch of assets. What's the arrangement that puts them to best use? Choice one is to have them owned by the government and run by a government-appointed board. There's no daily performance check through the sharemarket and no competition for control. The company can't be bought out.

That's the SOE model.

The second model has control up for grabs. Anyone who thinks they can do a better job with the assets can buy the owners out. It's that simple. The competition is intense and the company's performance is daily recorded on the sharemarket. That's the privatised model.

Which model do you think will see the assets put to best use? And remember best use means using the assets to provide what people want at a price they're prepared to pay. It's customers and the customers alone who determine how well a company does.

To ask the question is to answer it. That's why governments no longer ask it. The policy result is too scary for them.

But to make the country wealthier we need to apply our available assets to better use. That won't happen under government control and government regulation.

That was all spelled out 21 years ago in a government Budget. We have slipped a long way. In that slippage is the loss of New Zealand's true potential.

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Comments and questions
49

Nice thoughts, Sir. The key is to make good use of NZ's assets. privatisation can work but has not yet worked to benefit NZers yet. Take Telecom - a big con job - it merely ripped off new zealanders & did not invest in infradstructure (& again NZers are paying fr the broad band upgrade!). Ditto, with electricity and oil/gas. This is because of political self interest and 'clubbies (e.g. national party mates) attempting to feed off the taxdollar gravy train. Yes, some tax /dividend was returned but proportionately this was minimal & less than the cost of the asset lost. So, the issue is not poorly thought out economic theory (by those who are not qualified apart from being greedy) and its application; but, a serious and careful understanding of how assets can benefit people and therefore the nation. Alas, this requires intelligence.

Um, do you remember, #1, what is was like even trying to get a phone connection when the post office ran the show?

As it is, with the level of competition in the market, I can get wireless broadband in every major city, and even in the back of beyond in the Marlborough Sounds I can surf the Net as good as I can at home on my iPad via 3G.

So three people dislike that I get a good service from the telcos ( plural) I use. Right, oookay then ... I guess I have to take that personally.

Its prob more the fact that these telcos didnt give us the promised investment into infrastructure and we need 1.5 billion of tax dollars to get it now, after being farmed by high prices for years... TEL was a nice div payer though if you had shares

Except the Post Office wasn't an SOE either :)
It was a govt dept and like most at the time it had lots of political influence (soak up labour).
Under the SOE model this political interference is greatly reduced, and like any business its owners will interfere in it, and not always support it as they would like.

Are they still giving little Rodney column inches?

Yes. I'm very lucky. And they let me sign my real name. Just like big boys do.

Yes you use your name, but then again vanity isn't really one of your strong points is it?

Mr Lemon. Reflect on your comment. You are the reason this country struggles. No intelligent debate. No offering of fresh, meaningful ideas. No philosophic search. Just good, old, tired enmity.

Nastiness never produced a positive outcome anywhere. Now, with that in mind go and start preparing for your afternoon shift on the Courtney Place parking meters.

truly a lemon.

Ahhh the good old SOE model, a vehicle that has striped the assets from the direct control of those who own it, given license to pretend businessmen to follow any wacko whim, not to mention a front to gather what are essentially stealth taxes through extreme charging... the SEO model is broken, costing this country dearly. Some sell down or mixed ownership models can work, after all there are plenty of airlines with cheaper fares so who really needs Air NZ, and TVNZ, it's worth virtually nothing now and is functionally brain dead not to mention making hardly any bucks, we can probably all agree on that, but Rodney you are a traitor if you support the flogging off our primary wealth generation platform MOM or no MOM... you have got to be joking, power in a small economy like ours is an enabler not a commodity and it's cost to consumers should be as low as possible, I'd say less than half the price it is now. If you really want to make some money how about clipping the ticket on all the trading of NZ's overvalued currency that goes on, after all we provide the stable platform for the greedies to make their money so why aren't we in on the action considering it's our dollar and this activity damages our exporter's competitiveness... are we stupid? Don't know about you folk but I get the feeling we are governed by a corporation rather than a Government, citizens are under economic attack from their government, can you believe that? democracy is looking more like an illusion of choice and Rodney I can see you are wearing the cheerleader's uniform or is that a clown's costume.

There are only two ways to bring prices down: innovation and competition - or via taxpayer subsidies.

The former is permanent and beneficial, the latter is temporary and seriously harmful. Only a clown would vote for it.

Hope it helped to get that off your chest Paul N. If power prices were halved consumption would go up but the power price would be below the cost of building new power stations. So either we would have rolling blackouts or the Govt would have to spend our tax dollars building power stations that could not pay for themselves. Hardly an enabler ....

Paul, I'm absolutely with you on this. Power reforms were a catastrophe for this country, both economically and socially. Power is an enabler and should be controlled 100% by Government, supplying only at the break even point, to the consumer

Now, to rub salt into the wounds, the Government is triple-dipping on the tax payer. Firstly, the tax payer paid for the asset in the first instance. Secondly, The Government taxed the workers that built the infrastructure, and now (thirdly), the Government wants to sell the asset(s) and pocket yet more of our money.

New Zealand the way you want it?? Yeah right.

Contact may charge you for the supply of electricity, but there is no way you can confirm that they generated it?

True. My bad. But at least some of my power is privately generated!!

Rodney, I totally agree with your comment "to make the country wealthier we need to apply our available assets to better use. That won't happen under government control and government regulation".

The real underlying issue is economic recovery.

Lets face it, the government is always a consumer, not a producer. If you don’t want assets sold and you do want a true economic recovery then get the government cut taxes, cut government spending and get more money into private hands where it can be invested in growth. The worst thing you can do is to raise taxes and let the government spend more money. Then you really are poorer. You either create wealth by capital formation, investment and production. Or you consume it.

I would like some of the knockers to detail a situation where the ownership of a productive asset by government improved cash-flow and value. From what I can recall it wasn’t that long ago that a number of SOE's (CRI's) were instructed to improve their dividend to the government by loading up their balance sheets with some debt to force them into getting a better return on their capital by running the SOE more profitably. Did these SOE's in fact perform better, did their cash flow and value improve with the "old guard Board of Directors" still steering the ship?

What is of more concern to me is once these SOE’s are partially sold, what does the government intend on doing with the funds raised?

Our power assets dont have to be put to better use, they already are with the very best "better use".Further privatising such safe assets will not be any guarentee of good safe capital use, particularly with the message private greedy enterprise is crashing so many companies..the power assets much end run into the ground by hungry profit owners.

Charlie you mean the poor people might be able to heat their homes... you don't know consumption will go up to an unreasonable level beyond the cost of funding new power stations, you are making that up, however it might not support the irrational duplication of Government power SOEs. Tell me why in Welly water distribution is 17% more than it was in 97, though the privately Chinese Government owned former MED now delivers power at 400% more than the 97 price, mate you are full of BS, in fact you are actually proposing the punitive rationing of power thus betraying your true philosophy, saying those who can afford it have a greater right to their daily use than the poor (most of the middle class now) who own the asset. I would argue we don't need new power stations, LED light bulbs use 85% less energy than conventional, there's a 15% national saving right there, if Tiwai point closes one pot line, a sixth more electricity is available to the nation we could close power stations, you are just another stuck record mate and part of the problem, a case of knowing the price of everything and the value of nothing.

Quote: "if Tiwai point closes one pot line, a sixth more electricity is available to the nation we could close power stations"

Hah. On that logic, think of the power saving from closing down the city of Wellington. And I don't just mean financially, but what an excellent philosophical fillip also. As Alan says, below, the owners of an asset get to reap dividends and vote on management: on those two counts, alone, 'we' don't own these assets. Further, I would also add that a business sells for the net present value of it's future cash flows, so the government is simply, wisely, gathering those cash flows now, and hopefully putting them to better use (repaying debt, whittling back the size of the welfare state). So where's the problem. I wish Key were brave enough to go for full privatisation.

And, as a by the by, some weeks ago I put up a post regarding why assets sales were nothing to be worried over: I've still not had a single person arguing against asset sales answer to the question I pose in it, and would be interested to know if there is a successful counter.

Paul, you have a series of misconceptions. First, if power is under-priced demand will always eventually exceed supply even if only because the equipment deteriorates and cannot be replaced - but also because efficiencies and alternatives become uncompetitive. That was why I said subsidies can only be temporary.

I can't speak for Wellington MED but I can imagine a range of factors.

The poor do not own the asset. They never paid for it. Neither will they own the proceeds from selling it. But no doubt they will continue to enjoy more support from other New Zealanders than they will ever repay.

Moreover subsidizing power for everyone is a ridiculously inefficient and costly way to help the poor. It simply reduces the funding available for their other needs and gives it instead to people who don't need it.

Selling off State assets has worked a treat. Look at NZ Rail. The Government got a poor price, the business was run down and then flogged back when it needed capital. Air New Zealand was cut free only to acquire Ansett and fail.

The current mixed ownership model for Air NZ has worked extremely well, in spite of the large Govt shareholding. The key to its success is great management led by a couple of NZ's best CEOs one after another and great governance with one of NZ's top performing boards. There is the real secret to effective and strategic utlisation of assets. Not the dog eat dog world of capital accumulation, takeovers and capital plays. Capital market signals to Air NZ are almost meaningless as they largely reflect economic trends and oil prices. Air NZ has been successful beyond its share price due to great leadership and culture.

Never invest in an airline because it is a toy in the hands of Governments. The Keating Labor government deliberately destroyed the private Air NZ.

As for kiwirail - our own Labour government bought a hopeless dog for a ridiculous price. Nothing to do with management. Everything to do with dumb socialist ideology pandering to dumb socialist voters.

I was just thinking on Air NZ and how it has rebounded rather well under its MOM model (and under some great leadership to boot) despite some extremely trying global economic time.

Enter Kiwi Rail, the latest successor or rather chapter in the sorry story that is NZ Rail since the 80s especially with the huge write down it has just done. With the split KR seems to be going under I wonder if the freight business should be an MOM with Mainfreight partnering up (I am constantly hearing in the grapevine Mainfreight want to run their own freight trains), the commuter divisions under the respective Councils (Auckland a classic (basket) case) and long haul passenger trips under something else and the tracks/infrastructure still being an SOE (although if Mainfreight and Fonteria want to build private tracks let them).

Maybe I am being too much of an optimistic to get the same level of success with Air NZ over at KR!

What about seconding Rob Fyfe to manage KR? He'd run a mile..

To Rodney it is just the balance sheet:

'Today's argument is all about the government's balance sheet. Debt's running up, we must sell some assets.'

He peaks with all the myopia of an accountant who fiddles what by happenchance his accounts capture, oblivious of any substantive economic evaluation let alone the vastness of the market externalities they systematically ignore.

Even Roger Kerr was troubled by issues such as non-point source effects that mean the billions we owe our catchments are ignored-hush hush.

Such complexities as at least some resource charges would be too taxing for our simple Rodney.

His simple minded assets, so perfectly parcelled up, disengaged from the catchments they capture, the monopoly they inherit (or perhaps Rodney sees a large hydro power project flooding Auckland some time soon), and many legislative issues seem custom made for his naivety.

Off course if we made even some attempt to address these real costs his government deficit (a tiny proportion of his private sectors extraordinary indebtedness) would be turned into a surplus to invest in real growth and high earning enterprises.

Lots of big words, not much meaning. If it isn't your priority to own an airline or a power company, why should it be the Government's?

There seems to be a thought process that all of one thing or all of another will make the difference. If Air NZ has in fact done well under the Mixed ownership model - it probably is because of a number of things, market, timing, staff, CEO. etc. In the end I still see that it is the governments primary role to create an environment were we can all succeed and I see that would have to comprise a mixture of government funded and operated services and a number of private operated services, to support over all an outwardly focused sales service - i.e. Selling things out side of NZ to bring wealth into NZ. So to me the mixed ownership model (not necessarily always 51%/49% either) makes the most sense. Especially if it allows the government resources to be deployed with the right level of control (whatever that might be) over the whole raft of services we need to succeed. Not sure that any government or would be government have the right level of focus at the moment, but ideals are something we should always shoot for.

Unfortunately "Government service" is an oxymoron.

SOE sell down may not make us wealthy I agree. But one thing is for sure, the sell down WILL make the SOE's healthier.
That has to be good for NZ, surely ?

what beneficial (for the community) outcomes can you cite from any SoE that has been privatised?

Sure power prices continue to increase, assets continue to be revalued to justify the return, management on fat packages cos they are now publicly listed, getting bonuses for producing higher profits and dividends/share growth for some private investors. Nothing for the economy, industry and no long term strategic view for NZ. Great picture.

Ports of Tauranga, Auckland airport, Telecom, et al All much much healthier, well known way back in 1992!! http://www.worldbank.org/html/prddr/outreach/or3.htm

cite an outcome that was positive for the community not a company that profited by going private ..... big difference

Ports of Tauranga are a lot more positive for their community than Ports of Auckland is for theirs.
When an individual/business lifts its value/profit then its community has its value/profit/worth lifted by the exact same amount. Self evident simple arithmetic

Blame the Auckland Union. Port of Tauranga has done well from both good strategy and a beter industrial Relations climate. Port of Auckland has been screwed over by a union who insists on getting more than other workers doing comparable work (road transport logisitcs etc) In turn this has led to a downturn in Auckland region with freight and storage diverted to Tauranga.

Absolutely correct.
The debate is;
Does the union find the partly privatised Port a smarter and harder nosed master than the "len brown owned" Port!?
So it is with other SOE's I believe, i.e Unions and staff know, "wholly Gov." owned is a softer touch than "partially private"!
One guess who are out front stirring up the opposition?
Which personally I believe, is a great shame, a sad fact of life.
What you think?

NZ is a cheap, efficient producer of electricity or, at least it was, until stupidity and greed took over, hiking prices way beyond production costs and killing off industry and making life miserable for most NZ'rs. It is interesting here, that no one mentions that electricity is an exportable item, by adding value to it, and manufacturing widgets that the world wants. We have long become a low-labour cost market and if we could supply electricity as we once did at cost, NZ could eventually compete with the likes of China (for example) where labour costs are rising dramatically.

NZ is the little country that could... but can't, because their is none so blind than those who can not see..

Yep - cheap electricity would be a great stimulus for industry. Tax payers paid for the electricity generation assets once. SOEs revalued them upwards (and continue to) to a depreciated replacement value (or Optimised Deprival Value) and then demand a ROI and hike prices. Our electricity is expensive and hurting. In essence to provide a return to Govt (dividend), in essence another form of tax. Electricity reform has been a disaster for the tax payer. consumer and industry.

If you are really interested in long term prosperity for NZ then build another dam and don't sell any of the generation assets. When oil reserves start getting lower electricity will be the key. Dams cost a lot but if you do not revalue them every years and expect a return they are cheap and clean to run. Better dam another valley than a nuclear power plant.

Can anyone advise what the price of electricity is to the aluminium refinery and how does that compare to what consumers are paying? Are we exporting our electricity via the aluminium plant?
What would electricity prices be if the aluminium plant closed down completely, and that electricity supply came onto the grid ?

Generally accepted that NZAS (the company behind the Tiwai Pt smelter) receives its electricity at a discount to the wholesale price (e.g. Benmore nodal pricing). Contract probably builds in something like a 10-15% discount. Reason being largely that Meridian's Manapouri was built solely to serve the smelter, and they have low costs to serve and fairly low systematic risk associated with that asset, therefore can afford to charge less for power. Until now it has been almost impossible to transport power from Manapouri onto the wider NZ grid, but transmission improvements will probably change that. This is a large asset, so would have a significant impact on market pricing if electricity could be transported (and would discourage investment in other generation sources). Smelter seems likely to keep running though, from what I've read.

I gather that no, they can't. The aluminium smelter gets a discount, that we're sure of. But apparently the actual price they pay is "commercially sensitive" (i.e. politically unacceptable) so it's always been buried.

Happy to be corrected on this if anyone knows more.

All energy (including electricity) MUST be sold at open market prices.
If it is not, you'll get all sorts of harmful distortions, i.e just some of these distortions would be; industries subsidised at the expense of the consumer, wastage, and less investment/science into alternatives.

John Morrison, 'you'll get all sorts of harmful distortions' like so many of your type you really don't know what you are talking about, it's just a tired opinion flying in the face of reality. I've had a gutsful of people like you beating your sad old drum, you can fiddle while Rome burns, some of us have woken up to this BS, the only ray of hope is there may be just enough time left to undo the economic vandalism that has taken place in this country which is slowly driving us under, none of what you say regarding power rings true anymore, it's a sad old tune and proof the organ grinder is out of music and has been for years...

I guess this song is more to your liking?

The people's flag is deepest red,
It shrouded oft our martyred dead,
And ere their limbs grew stiff and cold, (from lack of Gov. heating)
Their hearts' blood dyed its every fold.
Then raise the scarlet standard high.
Within its shade we live and die,
Though cowards flinch and traitors sneer,
We'll keep the red flag flying here.

go jump in the lake

For a moment I thought Hide was making sense.No such luck. Well in this now so called "modern world" of late, it is simply that private enterprise has worked on one greed and make profit for the short term type sell again and buy another.Do we need this in New Zealand. The simple answere is NO.Leave wellalone that is working well.We dont need private enterprise in its present modern geek to missuse our good SOEcompanies , thank you very much..so leave us alone, you banking bunch and get the world in a better light befor you mess with our own NZ SOE's.

Why are memories so short?We've gorged on our prime asset already- the Crown surplus built up until about 2004 then squandered so quickly since by the now Knighted Cullen and sadly continued by the Nats. Years of citizen effort wasted by cynical redistribution policies like working for families, interest free student loans and worse, Cullen almost pulled off an ETS that was going to collect about $30 billion by 2030. Julia wasnt first to a mining tax! Wasnt it Thatcher who said "Socialism is great until the money runs out" Oh but the Morrison poetry sums it up. 'nuff said.

Don,perhaps we should keep to the present and the very now present proposed asset sales.That which kindlyhappened in the past is "history" and let us dear God and people learn from our past.Lets forget Shippley,Helen, Cullen ,sir roger D. It has / was not for our good longterm future.From 2008, we have gone on a spending spree non the less and sadly so.That in no way is a reason to sell real "hard assets." This is not about talking up the sale of eg "Trademe"by our pm.We talking real hard assets, that New Zealand safely owns and for good reason,has an income and an increasing asset capital value asset.Stop the sale of our assets into precarious several hands, is simply "The message-STOP ASSET SALES"and our grandchildren will thank us, as we thank those who worked so hard before us,with low wages building our power sources.Socialism has nothing to do with SOE's that are owned by NZ and now presently managed with seperate management not connected to governmant.Sell at our peril to the greedy future.One only has to look how Air New Zealand had to be purchased back after being run by "so called efficient private enterprise".