Transpower lease deal may have preceded law change

Transpower appears to have sold the South Island's electricity grid to United States investors in one of the last such deals signed before they were banned by the United States Government.

The state-owned national grid company is sticking to its guns that the controversial December 2003 overseas financing arrangement, on about $700 million of transmission lines and substations in the South Island, is purely a leasing deal.

But a Christchurch newspaper reported today that it has discovered that lease in-lease out (Lilo) deals -- in which an organisation leased assets to investors and then leased them back after receiving a one-off cash payment -- were outlawed by the US Government in 1999.

Transpower's agreement sneaked in before similar sale in-lease out (Silo) deals were banned early in 2004.

Transpower spokesman Wayne Eagleson said the state-owned enterprise had retained legal title to the South Island lines and was continuing to operate them as part of the national grid.

"These types of financial arrangements are regularly entered into by infrastructure and other utility companies here in New Zealand and around the world," Mr Eagleson said.

"They are in our view sensible business decisions which allow us to use our assets to generate additional revenue for our shareholder."

But leading US tax consultant Ken Kies, federal policy group managing director for Clark Consulting in Washington DC and former chief of staff for the US Senate's Joint Committee on Tax from 1995 to 1998, said the Transpower deal would have had a sufficiently lengthy lease term to be treated as a commercial asset sale by the US's Internal Revenue Service (IRS).

In some instances, such Silo deals had incorporated terms as long as 100 years.

"If it entered into a lease which was substantially for all the useful life of the property or longer, that's treated as a sale," Mr Kies said.

"They sold their asset, so they get paid for it."

A common feature of these deals was the option for the original owner to buy back the asset, using the investors' original money that had been set aside, after a period less than the full-term of the lease, often about 25 years.

"I'm assuming it (the deal) has a purchase option," Mr Kies said.

Papers from the US Department of The Treasury on Silo deals show that if the buyout option is not taken up, the investors can take possession of the asset, in this case the southern grid, or ask the other party to find a third group willing to enter into a service contract.

Kies was puzzled why Finance Minister Dr Michael Cullen had written to the US ambassador in Wellington seeking assurances that the US Government was comfortable with the Transpower deal.

"It's an interesting place to go for approval for sure."

He was also baffled by Transpower's other secretive deal, in which it secured a $200 million loan in December 2002 but actually raised $732.7m and lent $532.7m of that to unnamed financial institutions.

Experts have criticised that deal, saying Transpower is not a bank.

"It's very interesting. It seems implausible they would have loaned money," Mr Kies said.

Mr Eagleson said the 2003 cross-border lease arrangement had been disclosed in Transpower's financial reports and all material details of the transaction were disclosed to the Inland Revenue Department and ruled on where necessary.

- NZPA