If the Government was a business it would not issue shares in Meridian Energy right now. This is not a good time for the float for many reasons. Most obviously, one of its three publicly owned power companies has already been floated on the market this year and the price turned out to be very good for the taxpayers, not so good, so far, for those who bought the shares.
Meridian's just announced indicative price is $1.50 to $1.80, well below the $2.50 for Mighty River Power. It is even lower than the range at which Mighty River shares have been trading. In retrospect, it is clear the Government overestimated the market's ability to absorb these big, visible "grunty" assets, as Meridian's chief executive, Mark Binns, described them in the Weekend Herald.
Not only is the Government selling Meridian low, it is asking only $1 up front and allowing buyers to pay the balance in two instalments over 18 months. For retail investors, the initial price will be capped at $1.60 provided they hold the shares for those 18 months.
The reason for this generosity is fairly clear: a drop in the world price of aluminium has cast a pall over the New Zealand electricity industry and Meridian in particular. The Tiwai Pt aluminium smelter takes fully 40 per cent of Meridian's output, or 14 per cent of all power generated in New Zealand.
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Advertise with NZME.In response to the aluminium price slump, Meridian has agreed to reduce the smelter's power bill with the help of a $30 million subsidy from the Government.
The Government does not bother to deny that its decision last month to subsidise the Rio Tinto subsidiary had as much to do with assisting its share float as maintaining jobs in Invercargill. But even with the subsidy, the contract renegotiation has resulted in a $500 million write-down in the value of Meridian.
If the Government was a business it would put off the float in the hope that the aluminium price recovers and Tiwai Pt's prospects are looking brighter by 2017 when the current contract expires. But governments are not a business, that is why, despite these adverse conditions, the float is going ahead.
Governments are always reluctant to admit the main reason for privatising public assets. They prefer to promote the policy as a fiscal measure to reduce their Budget deficit or to release capital for use in non-commercial services such as education and health. But those arguments are weaker when circumstances require terms as generous as the Meridian offer will be.
The primary reason for selling public assets is not financial but economic. Privatisation, in full or part, exposes a public service to the reporting requirements of the sharemarket and the scrutiny of its active traders. The pressure that places on managers of any operation is felt far more intensely than the public service can match with its internal reporting procedures and political accountability.
Governments do not spell this out very often, possibly because the majority of voters do not manage a business exposed to the sharemarket and might not believe the difference it makes. But there is really no other reason to continue with the float of Meridian, and Genesis Energy to follow, in the conditions currently prevailing.
If New Zealand is to get all its electricity generators onto the sharemarket it probably has to be done by the present Government. The Labour Party remains implacably opposed to asset sales, even those that retain a majority public stake.
The market may be gagging on so many offerings in a single year but the economy will be better off for it in the long run.
