Sell-Down
Bernard Hickey lays into National‘s plan for a partial sale of some power generation SOEs and Air New Zealand. Actually, he lays into John Key – which makes me wonder if he hasn’t been hanging around too many lefties and contracted Key Derangement Syndrome. He says:
“In total, the four SOEs potentially up for sale generated total dividends last financial year of NZ$732.5 million and shareholder (government) equity stood at NZ$9.642 billion. This implies a combined (and very raw) dividend yield of 7.6% last year.”
While this is true, I think Hickey is confusing shareholder equity and the value of the company in a partial sell-down. For instance Meridian has about $5 billion of government equity but has a book value of $8.2 billion. Should that be a realistic value (and that is by no means certain), then that is the real amount upon which the government should be calculating dividend, because that is the amount of money they would receive in a total sale.
The total (optimistic) book value of all four assets is $16 billion; producing a real yield of a much more anaemic 4.6% – well under the current 5.5% at which the government is currently borrowing. It appears, then, that National’s plan has more merit than Hickey would have us believe.
The rest of Hickey’s article appears quite sound and worth a read. Amusingly, the Idiot at No Right Turn has linked to this article in a post berating National’s proposed asset sales. He appears not to have noticed that virtually everything else in Hickey’s article is complete anathema to Socialists. Except, perhaps, raising taxes.
Hickey mentions removing the elephant(s) in the room – Working For Families, Student Loans, Health and Welfare. I estimate that you could free up somewhere near $5 billion by eliminating Working For Families and Free Student Loans. More than enough to make Mr. Goff’s tax free zone $30,000, instead of a paltry $5,000, and still have change for some extra hip replacements. It would be worth it just to hear the apoplexy of Labour MPs.
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Jan 28 11 9:47 am
Add to the 4.6% expected capital gains of at least 2% from inflation and 1% from economic growth and we get a total return of 7.6% from holding the assets versus 5.5% cost of buying them. Seems like holding them is a good deal.
Jan 28 11 10:36 pm
Even if your calculation is correct, why is that a good thing. Current economic research suggests that the marginal government spending is wildly inefficient.
Jan 28 11 11:53 am
John Key argued it was better to sell power companies because he could then buy school buildings, operating theatres, roads and stuff..
I find that ironic because he has inadvertently laid out a graduated case for selling the lot!
The Govt certainly doesn’t need to own SOEs, school buildings are inanimate objects requiring maintenance and he doen’t need to own them either.. same for the other things mentioned.
What he does need to own is a sense of priorities, ie putting defense and policing first, protecting innate liberties, getting the mix of spending right between tradeables and non tradeables and so on.
JC
Jan 28 11 10:32 pm
Why on earth would you think defence needs more spending? Why did your list not have tax cuts?
Jan 29 11 10:07 am
I’m not talking about spending, or tax cuts. I’m talking about priorities.. as in the handful of basic things that govts should do. Stick to those and there’s much less need for high taxes and over regulation.
JC
Jan 28 11 3:39 pm
“Add to the 4.6% expected capital gains of at least 2% from inflation”
This doesnt generate cashflow so doesnt count, ie you can only realise that capital gain value when you sell and since you dont want to ever sell, then it wont ever be added to the return.
Jan 29 11 11:54 am
The real problem with partial private ownership of an SOE is that you run into the “a man can not serve two masters” problem. The aims of the private owners and the government are unlikely to be the same. Private investors will want to maximise profits while the government may well have political objectives it wants met. A firm can not do both and if it were to try it would just fail to achieve either.
Paul Walker´s last [type] ..Partial privatisation
Jan 29 11 1:17 pm
Then again, if the sharemarket doesn’t get these sort of quality listings, it might as well amalgamate with Australia. And if Kiwisaver doesn’t get a leg in, it will continue to have to look for best value offshore, and if the Govt continues to emphasise savings then it needs reliable places outside of real estate for people to put their money.
I think there’s more at stake here than just having two masters.
JC
Jan 29 11 4:33 pm
I think there’s more at stake here than just having two masters.
Actually no. The other issues are just a sideline. The problem with partial privatisation is that the firms will not perform as well as they otherwise could because of the combined ownership. The answer is of course full privatisation. That would also keep the sharemarket happy; but amalgamation with Australia may still be a good idea. And Kiwisaver, if we really have to have it, should look for the best value and if that is offshore then so be it and the Govt should just let people make their own saving decisions.
Paul Walker´s last [type] ..Partial privatisation
Jan 29 11 5:11 pm
But full privatisation is not politically possible, so we need to adjust to that and get something out of the deal.
“And Kiwisaver, if we really have to have it,”
Stop right there! The Govt giving a $1000 incentive and then ongoing $1000 annual tax credit plus the employer and employee contributions.. and packaging them all up and sending them to another country to develop *its* infrastructure sounds like Looney Tunes to me. We either have the right stuff to invest here or dump the scheme.
JC