By David Hargreaves
So, it will cost you, I and him and her a combined NZ$30 million of our hard-earned to keep the Tiwai Point aluminium smelter open just long enough so that the Government can flog off 49% of Meridian Energy.
That's about the size of the deal struck between Meridian and the company controlled by global giant Rio Tinto, with additional sugar coating supplied by the Government, courtesy of us.
From the point the Government first stepped in earlier this year in an attempt to 'help out' it was always obvious tax payers were going to be forced to front up with some readies for the pleasure of keeping the always controversial smelter running for a while longer.
I have no doubt that the smelter will be closed in 2017, which is now when the owners get the first chance to pull the plug.
But what the deal means, on the most pragmatic level imaginable, is that the Government can now push ahead with the float of Meridian and pick up the putative NZ$3.2 billion for doing so.
Will the NZ$30 million 'investment' by the New Zealand public - effectively just so the Government can keep its plans on track - prove worth it?
Really, I suppose it depends on whether you believe that the Government's strategy is a worthwhile one anyway.
If the Government does get the NZ$3.2 billion for the Meridian shares it will undoubtedly argue that NZ$30 million was a small price to pay.
If a Meridian float was attempted without some sort of deal struck on Tiwai Point then the returns could easily have been more like NZ$2.5 billion - so under that scenario the taxpayer would have been down NZ$700 million.
I don't agree with the Government's strategy. Effectively by selling assets the Government can keep spending on new assets (NZ$5 billion to NZ$7 billion worth) without having to borrow. But of course it is losing dividends by selling shares and my basic contention is that as sure as night follows day the other 51% of these state assets will be sold eventually. That's just what tends to happen.
So, the country keeps spending at the same rate it was, but over time loses the income producing assets. Over time that will lead to trouble.
But, given that the Government is totally, intractably, committed to the current course of action, then NZ$30 million of our money will have been a small price to pay.
So, what doe the deal mean for the immediate future?
Well, it will be full speed ahead for the Meridian float - I would guess in October.
By throwing out the date at which the smelter, accounting for around 13% of this country's power production, is closed, Meridian can prepare financial forecasts that will be wholly more appetising than would be the case if the smelter was to begin the process of dying now.
Whether the Meridian shares will be seen as a good buy given that the longer term future for electricity consumption still remains (after 2017) up in the air, will I suppose depend on pricing.
Remember also that Mighty River Power - which I think is a better company than Meridian - has not set the market on fire since its NZ$1.7 billion float earlier this year. Last time I looked the shares were selling for about NZ$2.37 compared with an issue price of NZ$2.50.
Given that kind of performance it is going to take a big effort by the Government and its well-paid team of thousands of helpers to get a good response to Meridian. Time will tell.
28 Comments
I don't agree with the Government's strategy. Effectively by selling assets the Government can keep spending on new assets (NZ$5 billion to NZ$7 billion worth) without having to borrow. But of course it is losing dividends by selling shares and my basic contention is that as sure as night follows day the other 51% of these state assets will be sold eventually. That's just what tends to happen.
So, the country keeps spending at the same rate it was, but over time loses the income producing assets. Over time that will lead to trouble.
Certainly, as the sold assets are strategically important and will be bought back by the Crown once the private sector has had the chance to hollow them out with over indebtedness and hence no NZ tax liability. Of course regular IRD collected tax would serve to lighten the costs NZers may incur bringing the asset up to working specification.
The formula is alive and well, just as Chalkie details:
Of course, people say a dollar tastes like a dollar wherever it comes from, but Chalkie reckons overseas buyers of New Zealand assets tend to taint their acquisitions with a bitter tax flavour.
Powerco, for example, is a highly profitable business but has paid next to no tax for the last three years. Here are the numbers.
In the nine months to March 2012, Powerco reported earnings before interest and tax of $79.6m. The previous year to June its ebit was $118m and the year before that it was $136.3m.
Nevertheless, over those three years Powerco had an interest bill totalling $465m, which converted those operating profits into huge losses and obliterated its tax bill. Indeed, Powerco reported a net tax benefit for those years of $32m.
The arrangement is beneficial to Powerco's owners - Brookfield and Queensland Investment Corporation - because more than a third of the company's debt is related party, allowing owners to extract profits from the business as interest while paying no tax.
There are tax rules designed to limit the ability of overseas owners to do this, known as thin capitalisation rules, but Chalkie reckons they have been as useful as a fart in a fishtank.
For example, Powerco's debt at the time fell well within the allowable ratio of debt to total assets of 75 per cent, but that did not seem to hinder its ability to create large tax losses.
Another overseas-owned lines company, Wellington Electricity Distribution, has an even higher proportion of related-party debt than Powerco and in Chalkie's reading of its accounts has paid no company tax at all since its sale by Auckland-based Vector in 2008.
The tax losses came despite healthy profits at ebit level of close to $50m a year.
Wellington Electricity Distribution, incidentally, is owned by Hong Kong-based Cheung Kong Infrastructure through a holding company in the Bahamas.
From last month the thin capitalisation threshold has fallen to 60 per cent.
To the layman Stephen, does this simply mean the IRD refunded Powerco $32m for those three years?
I've seen this link before and explained it to a few people who are fairly clueless (I'm relatively clueless) about accounting loopholes and profiteering by running up high interest as a result of increased debt.
Perhaps you could send this model to the media to explain to the Joe average exactly where our taxes are spent and how selling off our assets benefits very few New Zealanders.
Cambell Live would be your man!
We have to remember that the ethos of this Govt is also to shaft the masses, on behalf of the 1 - or whatever minority - %.
That's the same with the $15 mill 'seed money' for the Dunedin Stadium debt, as with this 30. They are quite content to screw taxpayers, while drawing attention to the 'book balancing'. The fact that they're still in the polls at all (still alive?) suggests a dumb or dumbed-down populace.
Amoral in the extreme - no respect for the rule of law (not even when their own Attorney-General tells them they have broken it) - the Law Society spells out the breaches of this Government act by act or bill by bill, as the case may be;
The Appendices are a must read.
Important people are now speaking out. Dame Anne Salmond for example (NZ of the Year) did an opinion piece in the Herald on this very subject. The media as well have had it with this Government. The worm is turning. If Peter Dunne cares anything about NZ he will not vote with them on that GCSB bill. Law society just came out and said the SOPs still don't make it acceptable - and neither is the use of the SOP process justifiable for such an important piece of legislation;
“The proposed use of the SOP procedure to make still further changes, but without making the detail of those changes available to the public, reflects the unnecessary urgency which has accompanied the GCSB Bill itself.
“This is in the face of mounting public concern and a denial of adequate public debate over the potential loss of personal and data privacy and increased levels of surveillance of both communications and metadata,” Mr Forbes says.
The concerns the Law Society expressed in its submission on the bill have not been significantly mitigated by the proposed changes.
There really is no more non-partisan entity than the law society.
And did anyone mention them price-fixing in the telecoms sector - over-riding the Commerce Commission in doing so? Total disregard for what is supposed to be arm's length regulation. Steven and John picked a winner - ploughed our money into it and it's a dog, simple as that;
http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10909596
This kind of headline in the Herald about a Nat Party action would have been unheard of previously. Again, all a sign that the worm is turning.
More like the other team(s) is no better....well...maybe a little...
NB,
The 1% only survive as long as 50% of the rest think they are still in the game, when the curtains on that delusion are parted.....well all bets are off.
I tend to think that the Green's surge from 7% to 14% isnt ppl suddenly finding green. More like finding they have an alternative to staying centralist-left Labour where before there was no other game ie when the Alliance folded.
regards
I think its the electorate realising that the Greens have some morals. They were the party in one of the support agreements with Labour that negotiated into that agreement for a degree of proportional representation in select committee chairs. Nine of the 13 committee chairs went to other than Government and its coalition partner (Labour-Progressive) in that particular Parliament (in the present Parliament I think only one of the SC chairs is held by an opposition party). This proportional representation in SC chairs was one of the aspirations Geoffrey Palmer had when he reformed the select committee process during his time as Leader of the House.
With our unicameral Parliament - the select committee process is one of (if not THE) key check on the executive. Say what you will of Russell Norman - but he understands and respects the rule of law and has a collaborative approach to governance. The Greens have spoken out on so many of the democratic injustices performed by both Labour-led and National-led coalitions in terms of their misuse of executive power (in particular the use of urgency in the House, that bypasses the select committe process), that if in Government they would have major, major egg on their face if they ever tried pulling these same shenanigans.
Kate what do you think of the idea that the Speaker be elected by a unanimous or near unanimous vote in Parliament? Then the Speaker is not the executive's 'man', which was the original intention when the executive was the king.
Do you think this would improve our national kindergarten that others call Parliament?
What if the Speaker appointed our key public servants. Would that improve the cronyism and poor quality that we see in our public service?
Do you think this is the sort of 'moral' behaviour that the Greens would support?
Senior public service appointments are made by the State Services Commissioner as things stand as a means to ensure such appointments are apolitical. The problem with for example Ian Fletcher's appointment is that the PM got involved when he should not have. It is the PM breaking with existing constitutional conventions that is more the problem - the conventions (i.e. democratic systems and procedures) are there its just that JK and his administration ignores them. Time and time and time again.
The biggest problem is the individual(s) - not the system in my opinion - and I think Russell Norman would be unlikely to breach these existing constitutional conventions. Key is just an executive with no regard for the privileges of office - he has similarly exerted executive influence on Parliamentary Services - again an institution that reports and serves Parliament, not the executive branch. It is his leadership that is the problem. He pushes people around - he didn't get the nickname the smiling assissin for nothing - that is his nature..
I find it telling that when he thinks someone has impuned his rights - as in the teapot tape recording - he brings in the police .. but he thinks he can legislate away New Zealanders rights. He is an elitist of the highest order.
PS - as for the Speaker - I think in the main we've always had reasonable Speakers - they often take a period to settle in and understand their need to be apolitical, but most get there. Certainly I've found the present Speaker has certainly improved in that regard. He is finally holding the government to account in ensuring that questions are addressed/answered properly. The present system of appointment does require that the Speaker has the confidence of the House - for example Trevor Mallard in the last appointment 'stood' against Carter, but of course it (like everything else in Parliament) is a numbers game. Normally the appointment goes unopposed - the reason Labour stood someone against Carter was more sending a message to the government about their misuse of their executive powers .. just a symbollic reminder, so to speak.
I completely agree with your examples and probably agree that Russel and Metiria would be better than Jonkey but they are unlikely to be the PM any time soon.
I also think that if we find about a few abuses of executive power it is likely to be the tip of the iceberg. How many abuses go unnoticed?
I have a friend who works in the electricity regulation field and he says the regulators and thereby the customers -all of us are constantly being undermined by a game between electricity suppliers and the Ministers/ Prime Minister.
Where I differ with you is that this problem is specific to just Jonkey -the individual. I think the problem is systemic. There is nothing to stop executive abuse in New Zealand -MMP certainly hasn't changed that, our Prime Ministers have just learnt how to bypass Parliament. I think all our long serving Prime Ministers have succumb to the temptation to abuse executive power. I am thinking of Helen Clark and Muldoon.
I think we have got into a pattern that with each crisis we centralise more power to the executive.
Earthquakes -CERA/Brownlee, terrorism -GCSB spying on citizens, economic crisis -Think Big then Rogernomics etc.
I am beginning to think that expanding executive power that later becomes abuse is more of a problem than the initial crisis...
My argument begs the question of what will happen if PDKs resource crisis is only a little bit true?
In the 1890s/turn of the century, after the boom times of NZ extractive economy -whales, seals, Kauri forests, gold and immigration boosterism went into bust there were several moral panics -the yellow peril and alcohol prohibition. (Belich, Paradise Reforged)
What sort of moral panic will we have if PDK is right? Will that lead to new and worse forms of executive abuse?
My personal view is we are locked into growth but not growing. So we are seeing the "little bit true" right now with supply of fossil fuel not increasing to take the price back to $50 where growth is easy. So for now we stagger along on the edge of recession while oil is at $105USD, once the marginal cost rises to $105 what happens next? shortages are already being programmed in as companies decide not to produce fields in the $120+ range...thats going to be...uh interesting....
The 1890s, well hopefully we have a better democracy now, women can vote and a more informed populace. Thus I hope the mis-directions succesful in the past can now be easily laid bear, if we want to listen of course. Iraq springs to mind, I dont see with finding no WMDs that anyone can conclude it was anything but a last dash for the last sizable convention fossil fuel reserves on the planet. So maybe we'll want to be mislead as that suits us...
regards
Democracy does not provide complete protection from moral panics. Here in Canterbury in the 1980s and 90s we had a little moral panic -sexual abuse, resulting in a gay man -Peter Ellis who worked in a childcare centre being convicted and serving a long prison sentence for sexual abuse.
Most people believe Ellis to be innocent. But the establishment including the feminazis in the Labour party did nothing about it. Phil Goff in particular has injustice on his hands for burying the inquiry. A good woman -Lynley Hood from down PDKs way wrote an excellent book about it -A City Possessed.
Probably. I suspect the holders of power will attempt to reinforce their positions vs others. Hard to imagine otherwise. At some point, though, the system falls over anyway.
I'm more interested in the fact that aluminium is not in enough demand for Tiwai (with totally sunk establishment costs, and reasonably sunk upgrade costs) to compete.
http://www.odt.co.nz/news/business/254162/aluminium-outlook-no-help-talks
I am not sure what to make of the Tiwai situation. Not sure if in the long term it is to NZs advantage to have access to a large supply of aluminium or if the electricity is better used elsewhere.
Either way given rising prices of resources and energy at least we have options.
Either the Nats are planning to ramp up the value of Meridian by artificially underpinning the supply of electricty to NZAS and thus ripping off potential investors, or they are planning to rip off taxpayers by selling cash cows to their wealthy mates at bargain basement prices.
They cant be doing both can they?
Smoke and mirrors
In the "big-picture" scheme of things, $30 million is a very cheap solution (bribe?) to
(a) get rid of an irritating obstacle to obtaining a successful float of Meridian, and
(b) kick the irritating problem down the road to be picked up by the 2017 administration
The immediate problem disappears, the bigger problem remains, just postponed
Am not remotely looking to support the Nats, who I long ago gave up trusting in either competence or integrity.
However there are at least two only partly linked issues here:
1) Is it sensible for NZ Inc to subsidise an aluminium smelter in a period of over capacity worldwide? and
2) Is it the best for NZ Inc to sell off the power companies?
On 1, in my view, there is a case for some subsidy, given the opportunity cost to NZ of closing the smelter. Who knows exactly whether the negotiations were well handled, and what cards each side had to play, but given an obviously low aluminium price, the outcome actually passes a sense check to me. Closing it would of course mean lower power prices for the rest of us; or the closing of some dirty or inefficient plants. These are not to be sniffed at- there is a compelling case for lower prices regardless frankly. But I do suspect lower prices would lead to some waste; while our current account would not welcome the loss of whatever earnings we do make from Tiwai Pt. We would quite possibly blow the difference domestically. David may know more than me, but I wouldn't take it as a given that in 2017 the plant will close. If PDK's hypothesis on energy is even a tenth correct in timing, energy will become a greater premium as we progress, and cheapish hydro will have an increasing competitive advantage internationally
On 2, I remain vehemently oppsoed to the sales for a myriad of reasons that many others and I have articulated before, so won't repeat them now.
My only hope is that the govt know that tiwai will evenutally close, and when it does electricity prices will crash horribly, so they are trying to sell off as much of the power companies while they are still worth something. A bit nasty selling it to the NZ public, but buyer beware and all that. This is the only reason I can see for the government to sell off these well performing assets that NZers obviously want to keep hold of.
You do have to wonder about this govt though - something really stinks with chorus. Surely it would have made sense for fibre to be rolled out by another company and for fibre and copper to compete, creating a proper market and lower prices. Instead, the govt allowed chorus to own both and are going to keep copper prices higher than the commerce commissions already over inflated recommendation just to make fibre viable and thier mates at chorus rich.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.