Your guide to asset sales

Mighty River Power's Nga Awa Purua Geothermal Power Station. Photo / Rotorua Daily Post

Prime Minister John Key outlined plans this week to sell shares in state-owned enterprises if National wins this year's election. Up to half the shares in power companies Genesis, Meridian and Mighty River Power and coal miner Solid Energy could be sold and the state's holding in Air New Zealand could be cut from 75 per cent to just over half. Simon Collins summarises what you need to know about what may be the defining issue of this year's election

Pros

1 Government borrowing will be cut by about $7 billion

Independent valuations value the Government's four energy companies at around $13.5 billion - almost half of that for Meridian alone, which owns most of the South Island hydro power system.

Air New Zealand shares were valued on yesterday's share price at $1.54 billion. The state owns 74.7 per cent, worth $1.15 billion.

So selling half the shares in the four power companies should raise about $6.75 billion, and cutting the Government's Air NZ stake to 50.1 per cent would raise about $380 million - a total of about $7.1 billion.

This is more than the Government's total forecast net borrowing of $6.4 billion over the two years from this July.

2 Investors will invest slightly more in NZ instead of overseas

The four energy companies are by far the biggest remaining state-owned enterprises apart from NZ Post/Kiwibank (ruled out for political reasons), Transpower (a monopoly) and Kiwi Rail (not a viable business without massive state subsidies). They are truly our "crown jewels".

Adding them to the sharemarket will boost the total value of companies listed on our stock exchange by a quarter, from $56.5 billion to about $70 billion.

Meridian, valued at $6.3 billion or $6.5 billion by two independent valuers, will be easily our biggest listed company, ahead of Fletcher Building ($4.7 billion) and Telecom ($4.2 billion).

Mighty River Power, valued at $3.7 billion or $3.8 billion, will be either our fourth or fifth-biggest listed company alongside Contact Energy ($3.8 billion).

Fund managers who invest our savings through KiwiSaver, super schemes or private savings say the small size of the local sharemarket has limited what they invest in local companies.

"The biggest problem as an institutional investor in New Zealand is finding really liquid companies that you can take positions in and trade in and out of," says Tower Investments head Sam Stubbs.

He says the average local managed fund has only 10 per cent of its money in New Zealand shares, and increasing tradeable shares by $7 billion will lift that proportion by about one-eighth ($7 billion over $56.5 billion).

Some of that will come out of other local investments such as property and bonds, but Mr Stubbs says most of it will be money that currently flows offshore.

"You'd be very tempted to look at selling up offshore power generating companies and bringing them onshore because you wouldn't have the risk with the currency," he says.

3 The partly privatised companies may find it easier to raise money for expansion

The four energy companies have built new wind and geothermal power stations and expanded Solid Energy's coal mines and wood pellet plants over the past decade.

The Government accepted low dividends in the good years, but in the recession it now wants higher payouts. Solid Energy's latest statement of intent says the company can't afford to pay higher dividends and its expansion will require extra share capital by 2012-13.

"Solid Energy acknowledges the shareholder's current policy priorities and recognises that the potential conflicts between these policies and the company's dividend projections will need to be re-addressed," it says.

Some of the money raised from the share floats could be ploughed into new capital for the companies - although that would reduce the net proceeds for the Government.

Wider ownership will also free the companies to expand globally.

"Meridian would be one of the best in hydro management anywhere in the world, so I'd expect to see them, without the shackles of Government ownership, to start looking to acquire positions if they came up so they could create value for shareholders," says energy expert James Miller.

"And Mighty River Power in geothermal - they are definitely best-of-breed in that space on a global basis, so you could see some quite exciting global investment opportunities."

4 Other local businesses will be able to raise more money for growth

Experts believe the tiny size of our sharemarket has held back new entrepreneurial companies that need share capital to grow fast.

Mr Miller, a director of the Stock Exchange, says listing the four state energy companies will be "a step change".

"This will give a lot of confidence to the market that they can do big deals," he says.

"It will have international fund managers all around the world looking at New Zealand again, and then if other investments come up such as Fonterra or Yellow Pages, they will be able to say, 'we just did this one for X billion and we are pretty confident we can put this one away'."

5 The partly privatised companies may cut costs and become more efficient

Miller says the three state power companies have higher costs per customer than the two biggest private power companies, Contact and TrustPower.

"It's computer systems, it's how efficient your back office is, just productivity," he says.

"They are going to get a lot more scrutiny, so they will manage to value. They will possibly have slightly shorter-term drivers that come from having their focus on value. There will probably be more focus on cost, on achieving world best practice."

6 Interest rates will be slightly lower

Reduced Government borrowing should mean the interest rate it has to pay will be lower than it would be otherwise. Institute of Economic Research director Jean-Pierre de Raad says it will help avoid a threatened downgrade of the country's credit rating.

"Avoiding a ratings downgrade would help in keeping interest rates some basis [percentage] points lower than we would otherwise need to pay," he says.

7 We may be very slightly richer

Lower interest rates, more efficient energy companies and better access to capital for growing businesses should all help our economy grow faster.

"We would be better off if the partly privatised companies perform better, and if our interest rates are lower than what they are otherwise would be so people would not need to pay such high interest rates for their mortgages and more business investment opportunities are viable," Mr de Raad says.

8 We may have slightly more jobs overall

Faster economic growth should translate into more jobs overall, although not necessarily in the enterprises that are being sold.

"This stimulus could generate some more jobs," Mr de Raad says. "But these effects from this policy alone are going to be small."

Cons

1 Power prices may rise

Power prices have already risen dramatically since the old Electricity Corporation was broken up in the 1990s and partially sold to Contact Energy.

An official review in 2009 found that residential power prices rose in real terms by about 80 per cent in the decade to 2007, while the cost of new power stations rose by only about 20 per cent. It concluded that the market was not fully competitive.

The law was changed last year to increase competition by measures such as transferring Lake Tekapo's two power stations from Meridian to Genesis, cutting Meridian's national hydro share from 70 per cent to 50 per cent.

But energy lobbyist Molly Melhuish says Contact and TrustPower have raised their retail charges (excluding line charges) consistently faster than the three state companies. By her estimates, TrustPower and Contact almost trebled the domestic energy component of their charges in the 12 years to last November, while the state firms raised their comparable charges by "only" between 90 per cent and 130 per cent.

Mr Miller says he would be surprised if past ministers didn't "pick up the phone" to the state enterprises whenever hydro lake shortages threatened power price spikes.

"It will be harder for the Government to control the sector - in the past they have had the ability to just make the phone call," he says.

"There is a risk of higher prices then [in crises] when there is a scarce commodity. Shareholders want to price-maximise, consumers want fair behaviour, so there is a conflict at that point, but it's not unsolveable with good regulation."

2 Greenhouse gas emissions may increase

An energy expert who wants to be anonymous says the state companies have been far keener on reducing carbon emissions than a private company would have been.

"Meridian made decisions about renewable energy that were absolutely in lockstep with Government policy with their investment in wind," he says.

"Others were building wind, such as TrustPower, but they were more clinical and commercial about it - so much so that Contact has never built a wind farm yet, and if it stacked up commercially they would have."

Greenpeace climate campaigner Simon Boxer says overseas governments that have sold off energy companies abandoned greenhouse gas emission targets whenever they threatened the companies' interests.

He says the Key government started fattening Solid Energy for sale this week when the company unveiled plans to make briquettes out of lignite at Mataura. Boxer says the briquette plant would be "a crime of global significance".

"We are at risk of damaging our climate performance in return for a quick buck," he says.

3 We may have more power cuts

The anonymous energy expert says state-owned Meridian and privately owned Contact have taken opposite approaches to managing their hydro lakes in dry summers.

"Meridian was much more conservative. They felt they had some responsibility to make sure the lights stayed on," he says.

"Contact was much more mercenary and much more worried about their returns for the energy they provided than about whether security of supply was compromised."

Ironically, however, he believes everyone may behave more responsibly when all the main players are privatised. He says the private players previously felt free to leave supply security to the state firms.

4 Jobs may be lost in the partly privatised companies

Unions worry that new private shareholders will achieve increased "efficiency" partly by cutting staff numbers.

"If you have an aggressive institutional shareholder demanding a better return, that raises the risk of job losses," says Engineers Union secretary Andrew Little.

But Forsyth Barr analyst Rob Mercer says well-performing companies are more likely to create jobs by pursuing every opportunity for profit.

"The rewards should flow first to those that deliver the results - the staff," he says.

5 Workers' pay and conditions may be cut

Little says private owners often cut costs by cutting workers' wages and conditions or contracting work out. He cites Air NZ - sold to a consortium led by Brierley Investments in 1989 and bought back in 2001 after the collapse of the airline's Ansett subsidiary.

"Our experience when Brierley had a stake in Air NZ is that they didn't care about industrial relations and the quality of the workforce. They just wanted their pound of flesh," he says.

"It has improved dramatically since state ownership if you look at improvements in people's pay packets and much greater flexibility in terms of rostering and hours that people work, and you have a culture and a climate that is more friendly."

6 Partial foreign ownership of our economy will increase

Mr Key says New Zealanders will be given "first priority" when shares in the state enterprises go on sale, and may be offered discount prices.

Mr Miller says Australia has sold many of its state assets with a discount for Australians. He says Mr Key could also impose an Australian-style limit of perhaps 10 per cent on any shareholder other than the Government. That would stop foreigners buying up big chunks like Australian-based Origin Energy's controlling stake in Contact.

Nevertheless, New Zealanders will be free to sell at least some of their shares to foreigners, and Mr Stubbs says overseas fund managers will be keen to buy.

7 Privatisation will not solve our economic problems

Economist Mr de Raad says selling shares in state assets will not be enough by itself to lift our living standards up to the level of richer countries such as Australia.

"The most important thing New Zealand needs is to have strong incentives to perform and invest (that is a competitive tax structure and world-class regulatory and social policy frameworks), a well-educated workforce, and strong trade connections with the rest of the world," he says.

"In other words, the proposal is just one positive step. But it would take us forward, rather than backwards."

8 This may be only the start - if the Government gets away with this, what next?

Mr Key has promised to sell only half the shares in the five state enterprises, but economist Tim Hazledine notes that if the companies need more capital later the Government's shareholding could easily be diluted to below half.

Mr Key also promised not to sell any other enterprises before the 2014 election. But he said other state-owned businesses "needed more work or they need to change".



On the block

Meridian Energy
Company valuation: $6.3b-$6.5b
Total shareholder return: 14.9 per cent
Revenue: $2.06b
Distributions to Crown: $353m
Employees: 804

Meridian is New Zealand's largest state-owned electricity generator, producing 30 per cent of the country's power. It owns and operates hydro stations on the Waitaki River and Lake Manapouri. It also has wind farms near Palmerston North, in Southland and Wellington. It has energy investments in Australia and the US. Note: Total shareholder returns are based on a five-year average. Revenue and returns to the Crown are for the year to June 30, 2010

Mighty River Power
Company valuation: $3.7b - $3.8b
Total shareholder return: 42.9 per cent
Revenue: $1.1b
Distributions to Crown: $286m
Employees: 821

Mighty River Power supplies around 16 per cent of New Zealand's energy demand. It has nine hydro power stations along the Waikato River, four geothermal plants in the central North Island and has plans for wind farms. It owns Mercury Energy, sells power and gas to 400,000 customers.

Genesis Power
Company valuation: $1.6b-$1.7b
Total shareholder return: 5.5 per cent
Revenue: $1.88b
Distributions to Crown: $39m
Employees: 961

Genesis supplies 19 per cent of New Zealand's electricity from its thermal and renewable power at Huntly as well as hydro stations at Tongariro and Lake Waikaremoana and a wind farm in the Wairarapa.

Solid Energy
Company valuation: $1.7b
Total shareholder return: 115.1 per cent
Revenue: $690m
Distributions to Crown: $54m
Employees: 1223

A major producer of coal for export and for New Zealand markets. Solid Energy has open cast mines around Huntly, Greymouth and Westport and New Vale in Southland. It also produces electricity from coal seam gas and solar waterheaters.

Air New Zealand
Company valuation: $1.5b
Total shareholder return: 19 per cent
Revenue: $4.05b
Distributions to Crown: $54m
Employees: 10,500

New Zealand's national airline carrier. Collapsed in 2001 and was bailed out by the Government which owns 76 per cent. The Government's stake was was valued at $880 million in December.























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