SOE sell-off could actually cost money - commentator

The government might find it would actually lose money by selling off stakes in its state-owned power companies, compared with borrowing the same amount of money, says a financial commentator.

Based on their earnings last year, the four state-owned enterprises (SOEs) potentially up for sale -- Mighty River Power, Meridian Energy, Genesis and Solid Energy -- produced a dividend yield 7.6%, yet the government was able to make new borrowings at an interest rate of about 5.5%, said financial commentator Bernard Hickey.

"On the face of it the government is a net loser by selling half of these state assets," Mr Hickey said.

But a business analyst at Milford Asset Management, Brian Gaynor, said Prime Minister John Key's proposal was better than the sell-offs under a National government in the 1980s.

"Unfortunately, when we sold our SOEs in the 1980s we did it all the wrong way," he said. "This is the first time that I've really heard a government talking about selling some of their assets in partial sales in a sensible way that means the control of those are going to stay within New Zealand."

Mr Key used his state of the nation speech today to point to the high level of total foreign debt -- at about 85 percent of GDP -- as New Zealand's "biggest vulnerability".

This was despite arguing in mid-December that the fact that government debt was "in very good shape" at only 18% of GDP and was likely to top out at 28.5%.

Though the National Party avoided the bogeyman of privatisation in the 2005 and 2008 general elections, he indicated that it was now prepared to press for it this year.

The push to sell off stakes in state-owned electricity generators has been on the cards since Energy Minister Gerry Brownlee announced over a year ago that he wanted to re-allocate emission-free wind and hydro power generation between the companies.

Yesterday Mr Key said Treasury would now analyse whether it was a good idea to sell off to 50% of the three state-owned power generators and miner Solid Energy.

But Mr Hickey said on his interest.co.nz website that for such sales to make sense then the interests costs of borrowing the money that is raised would have to be greater than the dividends that the Government will lose from the portions of the businesses which it sells.

"A quick tally of the dividends received and the equity invested suggests it's a line ball call about whether selling the asset is better than borrowing," he said.

The four SOEs potentially up for sale generated total dividends last financial year of $732.5 million and shareholder (government) equity stood at $9.642 billion – a dividend yield of 7.6% last year.

Yet the Government's new borrowings were currently costing it only around 5.5%.

"On the face of it the government is a net loser by selling half of these state assets," Mr Hickey said.

"For it to make financial sense, the government would have to sell the assets to the public... for book value or better and be expecting long term interest rates to be much higher than they are now."

The Treasury's crown ownership monitoring unit (COMU) has already churned out advice to the government on selling state assets – it was ready for cabinet ministers to consider before Parliament wrapped up for Christmas.

The Treasury policy review included examination of "what's best in, what's best out, partial ownership versus zero ownership" and alternative ways of raising capital against state-owned assets, such as the issue of corporate bonds and the "uncalled capital" approach used in an agreement to recapitalise KiwiBank.

COMU questioned the dividend payout ratios from the 17 SOEs it monitors, which it said showed an average 2% return -- compared to around 4.5% for NZX-listed companies -- even though the Government, as shareholder, had allowed investments of about $2 billion a year by SOE's over the past five years.