The National Government’s plan to sell 49% of the publicly-owned energy companies – Genesis, Meridian, Mighty River, and Solid Energy – and a third of the public’s shares Air NZ is bad for the economy. Here’s why.
- Higher power prices
On average, privately-owned electricity companies charge 12% more for electricity than publicly-owned ones.1 Privately-owned electricity companies have complained to publicly-owned ones that they are not charging enough for the privately-owned companies to make a profit2 and the CEO of Contact Energy has said that electricity prices need to rise for private investors to make a profit.3
Publicly-owned power companies can make a profit for the government while charging less than privately-owned electricity companies because the government’s cost of borrowing is only 4% whereas a private investors cost of borrowing is around 8%.3 That means that to cover its interest costs the government just needs a dividend of over 4% but a private investor needs twice that much.
So, what would happen if nearly half of the electricity companies were sold to private, often overseas, buyers? They would demand higher profits. The boards of companies would be legally required to act in their interests – it doesn’t matter if 51% remains in government ownership, the private shareholders rights to a higher profit would have to be respected. To make higher profits, they would charge higher electricity prices.
New Zealand has some of the most affordable electricity in the world4 because the publicly-owned companies hold the price down. If they were privatised, that anchor would disappear and prices would skyrocket.
- More profits going overseas
Every year, $10 billion net flows out of this country as profits to foreign owners of New Zealand assets5 – many of them sold off in the privatisations of the 1980s and 1990s.
The Government estimates, conservatively, that private investors would make $360 million a year from buying the assets it wants to sell6 and that 20% to 30% of the private shareholdings would be owned offshore.7 That means about $100 million a year more flowing offshore every year.
In reality, it would probably be much more than that. National says they want to sell the assets to ‘mum and dad’ New Zealanders first, but how many of us have the money to buy something we already own? They want to raise $6 billion. There are 1.4 million households. That means each family would have to fork out $4,000 just to keep what we already own. We all know that, in reality, the shares would go overseas, sooner or later, just like in past privatisations.
How will we ever grow as a country if the profits from everything we produce go into the pockets of people in other countries? That massive outflow of profits means that when a business or the government wants to build something here, they often have to borrow the money from foreigners, because we don’t have enough of our own savings.
- More government debt
By the Government’s own estimate, it would lose $360 million a year in profits from asset sales – $200 million in dividends and $160 million in retained profits.8 That is a low estimate, based on the average dividend return of $258 million in the past 6 years from the assets they want to sell .9 Even accepting the Government’s estimates on sales revenue, the reduced interest on debt is only $266 million a year. That means, the Government would lose $94 million net each year from selling the assets.
That money has to come from somewhere. It could come from higher taxes. It could come from cuts to public services. Or, most likely, it would come from more borrowing. The Government would get a one off boost from selling the assets but that loss of dividends, made up for with borrowing, would mount year after year forever, long after the sales proceeds were gone.
On top of those dividends, the government makes a gain when the value of the companies increases (equity gain). That isn’t money in the bank, like dividends, but it is an asset that gives the government’s debtors more confidence and makes it less likely that we will get another credit downgrade.
The four energy companies had an average return on investment of 18.5% per annum over the last five years, including both equity gain and dividends.10 This is more than four times higher than the Government’s cost of borrowing at 4%.
Would you borrow money on your credit card at 18.5% to put in a savings account for 4%? Of course, not. It doesn’t make sense. But giving up returns of 18.5% to save 4% is the same thing, and that’s what National is planning to do.
In the long-run, selling highly profitable companies for a one-off gain would mean more government debt, not less.
1 Ministry of Economic Development’s Quarterly Survey of Domestic Electricity Prices, February 2012 data, weighted averages
2 Commerce Commission’s Investigation into New Zealand Electricity Markets – May 2009, p122
5 Statistics New Zealand, Balance of Payments and Net International Investment Position – December Quarter 2011
7 The Government says it “expects” that 85-90% of shares would remain in New Zealand ownership, including the government’s 51%. That means that, of the shares sold, up to 30% would go offshore – as Bil English has conceded – Oral Questions, David Cunliffe to Bill English, 6 September 2011.
9 Analysis of SOE annual reports
10 Analysis of SOE annual reports