Opinion: The Government should get the Mighty River Power float out of the way and then halt asset sales till after the next election

By David Hargreaves

I was surrounded by business people. They were not happy. They were angry.

This policy I was assured, will ruin New Zealand. We will have no friends. Foreign investment will dry up. Disaster. We will stand alone.

Economists with a good grasp on history might be able to quantify just how much economic damage New Zealand's move to an anti-nuclear policy in 1984 actually did. (Well, what did you think I was talking about?) I reckon I would be correct in saying that New Zealand didn't quite experience the economic Armageddon those agitated business people who bent my ears backwards all those years ago suggested - nay insisted - that we would.

The point I am attempting to make here is that every time the political status quo is either changed or challenged then parties with vested interests start coming out with all sorts of dire prognostications. If foreign investment were to really dry up all the times business folk warned it would there would have been no foreign money at all in NZ in the last at least 30 years. But funnily enough, it has kept coming.

The initial extreme hysterical reaction from what can only be described as "the top end of town" (for this read "monied") to the Labour/Greens policy for a single power buyer has been so over the top as to risk becoming counter-productive.

Let's be honest, the financiers, brokers and wealth managers have been salivating at the prospect of partial privatisations of state assets for years, since the idea was first seriously mooted about the mid-2000s when we had a Labour-led Government that was intent on never selling anything. A change in Government to the privatisation-friendly National Party was needed for the private sector fantasies to be fulfilled.

The partial privatisations have seen a corporate feeding frenzy the likes of which NZ has not seen in years. Let's be blunt. Some people stand to make a lot of money out of this.

Throwing the toys

So, peering between the lines of some of the invective pouring forth on top of the Labour/Greens policy it has been possible to glimpse images of toys being thrown vigorously out of cots. "I want my privatisation! I want my privatisation!"

Following all this, it has become obvious that at least some people have realised within the past 24 hours that all this rabid scaremongering was probably not doing the Mighty River Power float any good.

Now, suddenly today, we have the Prime Minister, Finance Minister and some in the marketplace taking the “it’ll never happen” line. Yes, maybe Labour and the Greens will get elected but ooh, the chances of that funny plan they’ve got being brought in within the next five years or so are slight.

So, in other words buy MRP now and you’ll be okay for a good few years. Go ahead. Fill your boots.

Whether the damage has been done to the MRP float, we shall have to see.

I think some damage has been done, mostly because of the Government’s intemperate and unwise initial response to the Labour/Greens plan.

Reds under the bed

The response of the Government was genuinely surprising and showed that it had been clearly wrong-footed by what was a cynical political masterstroke. The sight of today’s politicians summoning up communist scare tactics that revisited the “reds under the bed” rubbish so beloved by National in the 1970s and 1980s was particularly unedifying.

If the Government had pulled out the “it’ll never happen” response first then investors might have been less likely to be put off.

I reckon the good news for the Government is that it will still be able to claim victory because the shares will be sold within the NZ$2.35-$2.80 range.

Less obvious might be the fact that just maybe without all these distractions the Government might have been able to get these shares away at NZ$3-$3.10. Remember the indicative price range is just that; indicative. In fact when National sold Contact Energy in 1999 it did indeed get the shares for mums and dads away slightly above the offer range at NZ$3.10 a share.

If the MRP shares were now to sell for say NZ$2.60 that would raise the Government NZ$1.78 billion, which looks okay.

But a sale at NZ$3 would raise NZ$2.06 billion – a difference of around NZ$280 million. And you could do quite a bit with NZ$280 million.

Selling it cheap?

The risk is that MRP is now going to be sold on the cheap side – if you assume the Labour/Green plan would never happen.

Frankly, the minute it began to look as though some possible harm had been done to the MRP share price – and I contend it has – the Government should have pulled the plug. Yes, halt the asset sales programme and then treat the power sector and the partial-privatisation policy as a kind of election-time referendum.

But of course the Government is so dogmatically committed to achieving the partial-privatisation that it was never going to do that.

However, it really should consider what it does next.

While I offer no view on the merits of MRP as an investment, I do happen to think it is the best of the SOE power companies. MRP is mostly in renewable energy with a nice mix of hydro and geothermal power. In contrast Genesis Energy still has substantial thermal assists that represent a kind of "work-through" issue for its future, while Meridian Energy (much the biggest of the lot) has the small problem of being the supplier of energy to the will-it-close-or-won't-it Tiwai Point aluminium smelter.

The point is that perhaps the returns from the MRP sale might not end up being as good as they could have - though the Government's unlikely to ever admit that. That's one possible problem.

The other potential difficulty is that all the fuss around the Labour/Greens issue just might mean that the MRP share price once the stock is listed on the sharemarket is not as good as it would have been either.

Under such circumstances you really have to wonder how the next two asset sales would go. Is it worth the risk?

Surplus talk

The Government's now saying that it is not dependent on asset sales to make its projected surplus in 2014/15, as the money released from the sales will be used for capital to buy other assets and is not part of operational funds.

Yes, okay. But if the Government doesn't get the NZ$5 billion to NZ$7 billion from the asset sales that is targeting to buy new assets with, how does it buy the new assets? Does it borrow the money instead? In which case there goes the surplus after all. Or alternatively, does it not buy those assets or simply cut spending somewhere else so that it can still buy them?

The Government seems to have dangerously locked itself in to one course of action and fears stepping back because it thinks it would lose face.

The rational way out of this would be to, okay, go ahead with the MRP sale. But then, let's have a stop and a think, shall we?

Personally I would forgive the Government if it halted the asset sales programme after MRP till the next election. Then the Labour/Greens plan can be put before and judged by the electorate. If it really is as nutty as National are saying, then Labour and the Greens won't win, will they?

If National held power again after 2014 it could confidently go ahead and sell the rest of the assets. This would seem a rational thing to do.

But of course, National would have the problem in the next year-and-a-half of what to do about the 2014/15 budget projections. Declare the surplus dead? Don't buy the new assets it said it would? Cut spending somewhere else?

Maybe, given the corner it has painted itself into, the Government's next step will be an early election, either late this year or early next.