Hard News by Russell Brown


Unwarranted risk

John Key and his government are fortunate that their asset sale programme is being fronted by a minister who knows how to stay out of trouble. The sang froid that has served Tony Ryall well in the Health portfolio seems even more pertinent now in his role as Minister of State Owned Enterprises.

Ryall was well-prepared for his calming performance on Morning Report today, and he needed to be, because what he had to say could be boiled down to "trust us" and "it'll work out".

Yes, the social responsibility clause in the constitutions of companies up for part-sale would go along with their SOE status -- but not to worry, because "all successful companies" make similar commitments of their own accord.

And no, the mixed ownership model legislation introduced last night does not, as the public might have expected, put New Zealanders at the front of the queue for the new share allocations -- but trust us, we'll work that out later when we know what's going on.

Key himself seems to have been at his blithe best:

Prime Minister John Key said legislation was not needed to guarantee priority shareholdings.

"You need to practically have it - it's essentially the application of the policy and New Zealanders will judge us on how well we execute that policy, but it's not necessary to have it in legislation," he said.

And he was positively cutesy after admitting that there was a hitch with the planned sell-down of one of the state-owned energy companies on the block:

The Prime Minister's flagged that there remain some issues regarding Solid Energy that need to be worked through before it can be put up for partial float.

But, following repeated media questions, he's declining to say what those issues might be.

"No, I wouldn't want to draw any conclusions today. We can play 20 questions but we haven't got that much time."

Such a wag.

What we seem to be seeing is a growing pile of increments of risk -- with few of the gains that would warrant such risk.

Even Bill English, in bleakly honest mode, seemed to admit as much last week

The Government has acknowledged that the state-owned power company profits it will lose as a result of partially selling them will exceed the savings from the resulting reduction in debt. 

Commenting on the Budget Policy statement released this morning, Finance Minister Bill English said the plan to sell up to 49 percent of the four power companies and to reduce its stake in Air NZ would result in a $6 billion reduction in net debt. It would also fund new capital investment, such as schools and hospitals.

However, it would also result in a "small'' reduction in the government's operating balance.

"Profits attributable to minority shareholders (foregone profits) will reduce the surplus, which is partly offset by a reduction in finance costs on the reduced debt.''

"Over the mixed ownership programme, the forecast finance cost savings exceed the forecast foregone dividends,'' Mr English said.

"However, those savings are less than the total forecast foregone profits of the SOEs, which include both dividends and retained earnings.

"That is because state-owned enterprises are expected to earn a commercial rate of return that reflects the risk of owning such companies.''

Remarkably, English also admitted that the biggest fiscal bang for the government, the one its case is largely predicated on -- selling right up to its self-imposed 49% limit -- will bind future governments to injecting cash into the former SOEs:

Speaking at a presentation on the proposed mixed ownership model at Victoria University in Wellington last night, English said once the Government sold 49 per cent of any of the state owned enterprises it would "have to" inject cash into the companies if they needed to raise cash, because by law the Crown would have to maintain its majority stake.

One of the reasons the Government has put forward to support its plan was to give the companies greater access to capital for growth.

"In some circumstances we would have to put more money in. It would be a decision with the companies about whether you sell down the 49 per cent straight away.

To repeat: in the name of a one-off freeing up of cash, the government is passing legislation that would structurally commit future governments to put more capital into the businesses.

The government has a mandate for this policy: it was declared well in advance of last year's general election and National received enough votes to form a  government. But beating a beleaguered opposition is not the same thing as acting prudently. Is a rearrangement of the government's books sufficient reason to so profoundly alter the constitution and ownership of companies tied so closely to key natural resources?

At the least, I'd expect to see a de facto rebuttal of the clear arguments against the asset sale policy advanced by Rod Oram. I'm not holding my breath. And I am not exactly filled with trust.

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