BUDGET PREVIEW: MRP sale – hopefully the start of many

With the unprecedented demand for Mighty River Power shares and its obvious success, any indications in the Budget that the government may look to accelerate its sales programme should be warmly received by all New Zealanders.

Why? Because these sales will make the country a better place to live for us all.

It is not about selling the family jewels. The government has more tha $150n billion invested in state-owned enterprises, Crown Funds and Crown entities (well over $100b of commercial equity and another $50b of crown entities).

A mere 2% of that value is at stake with the sale of Mighty River Power, which equates to only $3b of equity.

It is about making sensible decisions that will return this country to being financially independent and not relying on the banks of the world to keep us going.

Don’t think we are immune from the problems of Europe – we’re not. And unless we turn the ship around in the near future, the rocks of disaster are looming.

Just remember, the government deficit was $9.2b for the financial year ended June 30, 2012, or 11% of gross revenue. This is expected to reduce to $7.3b (8.7%) by 2013 and to $2.0b (2.2%) by 2014. By comparison, Greece was at 8.1% for the 2012 year and the European Union target is for countries to have a deficit to GDP of no more than 3%. 

We are a country in debt. The total projected government borrowings for years ended June 30, 2013, is $103b and this is expected to rise to $118b by June 2016. This represents a debt per New Zealand household of $61,000 for June 2013 and $69,000 by June 2016.

When you consider that the average household income in New Zealand at June 30, 2012, was only $79,000, our debt to average income is presently 77% of average household income, rising to 87% in the June 2015 year.

The government is forecasting to borrow an extra $4b net in the June 2013 year, $12b in the June 2014 year and reducing significantly to nil in June 2015 but bouncing back to $6b in the June 2016 year.

As the late Baroness Margaret Thatcher famously said: “Even a British housewife knows that you can’t keep spending more than you earn.”

Three ways to pay down debt

There are three ways to pay down debt: cut costs, earn more, or sell assets that are not critical – and it is the last of these that is the most attractive option. The partial sale of state-owned assets such as Mighty River Power by floating on the NZX is a "win win win"! 

Why? Because it will help pay down government debt more quickly, it will add considerably to the strength of the New Zealand stock exchange and it will help temper the love affair we have with the non-productive residential property sector.

And New Zealand will still have control. The listing will not migrate to Singapore or Sydney.

If, as indicated, Mighty River Power lists at between $2.35 and $2.80 per share and raises between $1.6b and $1.9b, that would be used by the government to pay down debt shortly after the listing date of May 10. This would be a repayment of about 1.7% of total borrowing.

The impact that floats like Mighty River Power have on the sharemarket cannot be under-estimated. Most importantly, it adds another blue chip equity to the small NZX that has had a drought of quality new listings.

For many of the 440,000 New Zealanders who have registered to buy shares, this will be a new form of investment and away from residential property.

It will also be an attractive investment for NZ Inc related investment entities such as ACC and the NZ Superfund, not to mention the many other large institutions that are looking for quality investments on the New Zealand market.

And this type of privatisation is extremely important for KiwiSaver funds. There are 2,077,846 New Zealanders enrolled in KiwiSaver at February this year, with 64,000 more women enrolled than men.

In the 2012-13 financial year there were combined contributions from the government, employees and employers of $2.1b, but this will increase to $3.15b in the next year after changes to contribution levels.

This fresh contribution of $3.15b needs to be invested, and what better place than blue chip partially floated New Zealand shares resulting from asset sales?

Adding to that is the possibility we will likely see KiwiSaver made compulsory soon and that could add another two million members, potentially doubling membership. Contributions will double, too, from $3.15b to $6.3b a year - money that must be invested annually.

Already the percentage of money being invested off-shore through the likes of ACC and the Super Fund is too high. However, it continues to increase because of the lack of suitable opportunities here. Mighty River Power is a start in reversing this trend.

Despite our debt problem, there is also much to be excited about. Our economic growth is expected to be 2.3% in the year to March 2013, 2.9% in the year to March 2014 and easing to 2.4% in later years, which will outstrip the growth of Australia, the United Kingdom, Europe and the United States.

Couple this growth with an accelerated asset sales programme and we will really start to see New Zealand progress and give the country the resources to tackle our stumbling education programme, enhance our efficiency with a comprehensive infrastructural budget and wrest back control of our destiny from offshore funders.

Peter Shewin is a partner, Privately Held Business, at Grant Thornton New Zealand, chartered accountants and business advisers. Email: peter.sherwin@nz.gt.com