The Dim-Post

July 14, 2012

Worst case scenario for National

Filed under: economics — danylmc @ 11:22 am

Is that they sell Mighty River Power, and a combination of uncertainty over water claims and depressed market conditions leads to a failed IPO, which means we lose 49% of the future revenue, but Key and English still have to raise taxes/borrow/cut spending to make up the deficit shortfall (because Treasury have already booked the profits from the sale of the assets onto their books).

That’s also a terrible scenario for the country, although if it pans out that way the Herald columns praising Key for his business genius, CEO style and visionary leadership will cheer us all up a bit.

51 Comments »

  1. How does a “failed IPO” lead to us still losing 49% of future revenue? Surely if the offer is undersubscribed, the Govt ends up retaining a greater share of the companies, hence more of the money they make?

    Also, couldn’t the Govt put a condition on the IPO to say “if there is not full take up of all shares on offer, then no shares will be sold” … leaving us no worse off than at present (except for the millions in consultancy fees paid out, of course)?

    Comment by Flashing Light — July 14, 2012 @ 12:08 pm

  2. A couple of photo-ops should put things right:

    Scene: John Key standing in front of a run-down rural school, beautiful scenery, shabby buildings, cute kids …

    “The Future Investment Fund was for our Children. Why does Titewhai Harawira hate Children? Why has she destroyed their Future by playing the Race Card? When will we all come together as One? How long, oh Lord, how long?”

    Comment by sammy 2.0 — July 14, 2012 @ 12:10 pm

  3. Either way it’s win-win for the Greens right.

    Comment by Tim — July 14, 2012 @ 1:33 pm

  4. “That’s also a terrible scenario for the country, although if it pans out that way the Herald columns praising Key for his business genius, CEO style and visionary leadership will cheer us all up a bit.”

    The same thing was said about Enron, and we know how that turned out.

    @ sammy 2.0: people say that Key & Co don’t have a Plan B. They do actually – it’s called the 3 D’s: Divide, Dehumanise, Divert. What they don’t have, though, is a Plan C.

    What Shearer & Norman et al need to do now is to somehow superglue the JP Morgan & Barclays scandals to the whole thing.

    Comment by DeepRed — July 14, 2012 @ 2:12 pm

  5. Robert Muldoon broke New Zealand with his Think Big ideas, now John Key is about to make New Zealand broke again with his Sell Big ideas.

    Comment by hellonearthis — July 14, 2012 @ 3:42 pm

  6. I for one am glad that we have such an excellent salesman for PM. I personally have no doubts that the nice man John will do everything in his power to keep the sales on track. Its great to know that New Zealanders who don’t value economic sovereignty are so well represented.

    Comment by alex — July 14, 2012 @ 4:06 pm

  7. I’m looking forward to the column by John Armstrong right now. See, always something to hope for.

    Comment by Lucy Hawcroft — July 14, 2012 @ 4:23 pm

  8. “(because Treasury have already booked the profits from the sale of the assets onto their books)”

    yes, the secret of being Good Economic Managers™ is too make sure all chickens are counted before they hatch. far too late when they’ve already come home to roost…

    Comment by nommopilot — July 14, 2012 @ 6:51 pm

  9. It’s both National and their opponents who have staked their futures on the sucess or otherwise of the partial floating.

    If it’s a failure then National will be out but on the otherhand if it’s a sucess then Labour will stay in opposition.

    Hard to know but those energy companies are good investments and my guess is that institutional investors will keep the share price up.

    But whatever the case may be it’s true that we either have the asset sale or raise taxes and borrow more money or cut govt spending. We have such great options. Neither Labour nor National really believe we can grow our way out of trouble anytime soon.

    Comment by NeilM — July 14, 2012 @ 7:01 pm

  10. If it’s a failure then National will be out but on the other hand if it’s a success then Labour will stay in opposition.

    How do you define the success of the sale? I remember Labour getting cock a hoop at the $4bn they got for Telecom back in the day, and that deal is widely considered to have been deal of the century for the purchaser.

    Comment by Paul Rowe — July 14, 2012 @ 7:15 pm

  11. “It’s both National and their opponents who have staked their futures on the sucess or otherwise of the partial floating”

    not quite. the opposition have staked their futures on the popularity of the sales and rightly so. No doubt the sales will be a “success” for someone, but most people will just be standing by, watching the looting without the financial wherewithal to take advantage of it. there is no outcome of these sales that could be considered a success for Ordinary New Zealanders™ because if you can’t afford to buy shares all you get is the joy of watching the government fritter the money away followed by the joy of watching your taxes and power bills rise each year while the government provide less and less services.

    best case scenario is a large degree of buy-in from kiwisaver and the super fund, but government retaining ownership is still preferable.

    Comment by nommopilot — July 14, 2012 @ 8:53 pm

  12. Don’t worry – the IPO won’t be undersubscribed. An undersubscribed IPO is such an embarrassing outcome that they always under-price the shares to avoid it happening.

    Comment by kahikatea — July 14, 2012 @ 8:57 pm

  13. #10: “How do you define the success of the sale?”

    Success for the ‘One Percenters’ and failure for everyone else? Air NZ and TranzRail management majorly screwed up, and only survived after being bailed out by the State. Why else would the usual suspects be relying on the Three Ds tactics to draw attention away from the power co asset sales? How many Mum & Dad investors apart from Bernard & Ruth would invest in the power co’s, when they aren’t belt tightening?

    “I remember Labour getting cock a hoop at the $4bn they got for Telecom back in the day, and that deal is widely considered to have been deal of the century for the purchaser.”

    Who then milked it for all it was worth and skimped on infrastructure before bailing out of it, ending up just like the infamous Ma Bell monolith. Only after unbundling happened – our equivalent of the state-sanctioned breakup of Ma Bell – was it jolted out of resting on its laurels, and NZ is still recovering from the One Percenters’ looting. Silicon Valley would dearly like to put money into NZ tech startups, but the broadband market remains far too cartellised. Even many of a fiscally libertarian bent – especially the IT-savvy ones – recognised the market failure of Telecom’s vertical monopoly.

    And Brian Gaynor has pointed out that NZ’s sharemarket is already skewed towards inward-looking ex-state monopolies than other comparable nations. Agriculture, ICT and finance have a tiny NZX presence for their size in the NZ economy.

    Comment by deepred — July 14, 2012 @ 9:22 pm

  14. Wow, frothing tonite eh red.Keep up the good fight.

    Comment by Tim — July 14, 2012 @ 10:53 pm

  15. That’s the way lil man. Wouldn’t want you to use your self-resportedly massive IQ actually try to address the issue or anything. That would be embarrassing.

    Comment by Judge Holden — July 15, 2012 @ 8:13 am

  16. ” I remember Labour getting cock a hoop at the $4bn they got for Telecom back in the day, and that deal is widely considered to have been deal of the century for the purchaser”

    The original purchaser did alright. But today telecom is worth less than what it was sold for. So I think the Government did pretty well.

    Comment by Swan — July 15, 2012 @ 8:42 am

  17. Thanks Judge Dredd or whichever hat-tip to your ego you’ve chosen as a handle today chap

    The “issue”:

    Is the Greens’ disingenuous sniping at any policy initiative that offends some focus group driven pseudo Green sensibilities irrespective of benefits such as a deeper wider more liquid local capital market.

    Is your unsubstantiated claim that “Silicon Valley would dearly like to put money into NZ tech startups, but the broadband market remains far too cartellised” (WTF has that got to do with floating some power companies beside freeing up the capital to spend on UFB infrastructure – doh, doh doh)

    Is good little doggies such as red, yourself et al yapping in support.

    When it’s that f*cking obvious I don’t feel obliged to explain myself but just for your benefit I’ll stop watching Sally Jesse and put my big bottle of Lion Red down for long enough to kick the dog out of the P lab and explain just for you..

    Comment by Tim — July 15, 2012 @ 11:28 am

  18. Swan wrote: “The original purchaser did alright. But today telecom is worth less than what it was sold for. So I think the Government did pretty well.”

    I think you’ll find that’s because Telecom paid out massive dividends for over a decade, rather than reinvesting its profits in the infrastructure that produced those profits. It was worth more before all the profit was taken out of it.

    Comment by kahikatea — July 15, 2012 @ 11:41 am

  19. Yep embarrassing, Timmah. Your 155 IQ score; that’s a self-assessment right?

    Comment by Judge Holden — July 15, 2012 @ 12:19 pm

  20. Sorry, I was watching “Bathhursts’ Greatest Smashes” and didn’t hear you. Let me pause the recording, backhand the kids out of the Winnies packet and go find my School Cert results for you.

    Comment by Tim — July 15, 2012 @ 12:40 pm

  21. @ Tim. I’m surprised you think the Green Party can actually afford to run regular focus groups….Only the government has the money to do that.

    Comment by Amy — July 15, 2012 @ 2:44 pm

  22. Just like they can’t afford to run petitions against asset sales out of PS funds eh Amy.

    Comment by Tim — July 15, 2012 @ 3:02 pm

  23. “because Treasury have already booked the profits from the sale of the assets onto their books).”

    If you are correct on that Danyl (and I assume you are😉 ), then that is an outrageous piece of accounting fudgery! What business gets to increase their sales revenue prior to the sale taking place, or even being likely to go ahead (given the Maori Council legal case against the SOE sales)?

    Key’s govt seems enamoured of the kind of dishonest accounting that Labour did at the end of the 80s, and saw the Fiscal Responsibility Act (or title akin to that) passed to prevent govt lying about their books prior to an election to make themselves look good to voters…

    Perhaps a shrewd MP from Greens or Mana could put up a Members Bill criminalising such fraudulent accounting?

    Comment by bob — July 15, 2012 @ 5:23 pm

  24. ” It was worth more before all the profit was taken out of it.”

    Not sure of your definition of profit, kahikatea, but if you are saying that the capital stock was capitalized, I find it a bit hard to believe telecom had more capital in 1990 than now. Telecom now has a 3G mobile network in addition to its copper and fibre networks. Did it rip up and sell the copper back in the 90’s? No it didn’t. So what your point?

    Comment by Swan — July 15, 2012 @ 6:23 pm

  25. Sorry by “capitalized” I meant cannibalised.

    Comment by Swan — July 15, 2012 @ 6:24 pm

  26. Swan @24

    No Swan, the point is, quite clearly, that since the 80s the scale and performance of the network has needed to grow quite considerably, to keep paco with technological advances & with customer expectations. Unfortunately Telescum failed to invest sufficiently in this and focused instead on usind their monopoly to gouge their customers and pay out high dividends and CEO salaries to the point where as soon as customers had any choice they deserted in droves. Another win for the increased efficiency of the private sector?

    Comment by nommopilot — July 15, 2012 @ 6:30 pm

  27. #23: It would also indicate regulatory capture, where the foxes are in charge of the hen house. The roles of the US SEC and Federal Reserve in the Great Recession also comes to mind.

    Comment by DeepRed — July 15, 2012 @ 6:32 pm

  28. point being, that, the general public want different things out of their utility providers than private shareholders (especially foreign investors) do.

    Comment by nommopilot — July 15, 2012 @ 6:34 pm

  29. You have the reason for telecoms decline right, nommopilot: competition, in many forms. Are you trying to say that a government run telecom would have been more responsive, and maintained a higher market share? If so I would suggest your argument is more faith based than evidence based.

    Comment by Swan — July 15, 2012 @ 6:39 pm

  30. “When it’s that f*cking obvious I don’t feel obliged to explain myself”

    Haha Tim. I love the “my argument’s so good I don’t even need to say it” gambit. Only really smart people can get away with it. by the way though, for those of us not as endowed with extreme intelligence as yourself, please, do explain. I’m really dying to hear it.

    btw when I read your posts I imagine Karl Pilkington’s voice reading them. They’re 10x funnier that way.

    Comment by nommopilot — July 15, 2012 @ 6:45 pm

  31. “If so I would suggest your argument is more faith based than evidence based.”

    There’s no way to run a parallel experiment. Telecom forced the need for competition through their underperformance. It’s not really about the governance model as the ownership model. It could have been in government ownership but run with a corporate structure. The government would have the ability, as they do with TVNZ for eg., to forego dividends in favour of infrastructure investment and to direct a strategy for development rather than leaving it up to the blind, fumbling, invisible hand…

    It’s too complex a thing to second guess, but from the perspective of those of us putting up with teleco infrastructure that’s a decade behind the 8-ball and slipping, privatisation turned out to be a crappy plan. The costs to our economy of that lacking investment go beyond Telescum’s low share price, it’s hamstrung a lot of innovation that could have happened here but happened overseas instead.

    Comment by nommopilot — July 15, 2012 @ 6:54 pm

  32. “to direct a strategy for development rather than leaving it up to the blind, fumbling, invisible hand… ”

    btw this is my primary reason for opposing the current asset sales. Our country is in a position where we will likely very soon need to considerably change our entire energy model and selling power companies and solid energy is going to remove a very powerful tool for the government to direct how our energy infrastructure is developed so that when our kids grow up they’ll still have a working energy infrastructure. The loss of control is even worse than the loss of foregone dividends (also really bad)…

    Comment by nommopilot — July 15, 2012 @ 6:59 pm

  33. Been down the pub Nomo?

    “Our country is in a position where we will likely very soon need to considerably change our entire energy model”

    Bah ha ah ahaha haa ha.

    Comment by Tim — July 15, 2012 @ 7:59 pm

  34. Oh Tim, you and you’re incredibly obvious unspoken winning arguments. You should start your own blog. Every day you could write “ah ha, again I have something really witty and interesting to say, but I don’t need to because it is so obvious and I am so clever. I win again you yapping brainwashed dogs”…

    Comment by nommopilot — July 15, 2012 @ 8:06 pm

  35. have you ever commissioned market research Tim? Believe me, $75,000 don’t buy you a lot of focus groups. Certainly not enough to regularly use them to generate policy as you suggest the Greens are doing.

    Comment by Amy — July 15, 2012 @ 8:54 pm

  36. @Amy
    35.have you ever commissioned market research Tim? Believe me, $75,000 don’t buy you a lot of focus groups.
    They saw you coming, and you got ripped off. Next time try AC-N.

    @nommo
    as soon as customers had any choice they deserted [Telecom] in droves. Another win for the increased efficiency of the private sector?
    Customer’s being able to move from one service provider to another and not be stuck with a monopoly… fuck yeah, that’s a win for efficiency and competition.

    Comment by Phil — July 16, 2012 @ 9:04 am

  37. “fuck yeah, that’s a win for efficiency and competition.”

    yes, but not evidence that privatising an SOE automatically delivers benefits to customers. a lot of shareholders and a few CEOs did very well out of the sale but most of us just got slow internet at inflated prices until the government was forced to step in and do something.

    Comment by nommopilot — July 16, 2012 @ 9:13 am

  38. That’s a fair point – but remember that the Governement was only “forced to step in” when the volume of noise from groups like TUANZ became too loud to ignore. I don’t believe that a government owned Telecom would have acted any differently to the government regulated Telecom we had/have.

    Philosophically, I’m ambivalent as to who owns a telecommunications network, or a railway, or a hydroelectric dam. What I think matters most is that the structure of the market allows competition to develop.

    Comment by Phil — July 16, 2012 @ 12:38 pm

  39. “Our country is in a position where we will likely very soon need to considerably change our entire energy model”
    Oh-oh: I smell AGW!
    But anyway, if our “model” is going to change, then surely we want to ditch the old model whilst we can still get cash for it..?
    What will the new model be? Solar panel that don’t work at night? Windmills that don’t work when the wind drops/gets too windy?
    Or do you mean that the old model is demand/supply where you pay for what you use, with price signals encouraging us to maximise our individual welfare? Is the new model where everyone gets a rationed amount, paid for out of taxes? Except for the state: the state can use as much as they deem necessary in order to look after use, like the way the Green MPs fly around the country on my dime, but all the while worrying about co2 emissions?

    Comment by Clunking Fist — July 16, 2012 @ 12:47 pm

  40. “because Treasury have already booked the profits from the sale of the assets onto their books).”

    If you are correct on that Danyl (and I assume you are😉 ), then that is an outrageous piece of accounting fudgery!
    Not really – it’s stated forward policy of the elected Government. So they absolutely should be assuming loss of the ongoing dividend and the new debt levels/investment funding sources in their forward model. It would be prtty outrageous to ignore it to be honest…

    And Danyl I presume by “failed IPO” you actually mean “IPO that gets a pretty shithouse price but still goes ahead anyway”. Because they can and (abso-fucken-lutely better) halt the whole thing if they don’t achieve reasonable valuations on the bookbuild. That, of course, would be a massive political failure so their commitment to base fiscal responsibility vs political pointsmanship would be sorely tested…

    Comment by garethw — July 16, 2012 @ 2:20 pm

  41. With all due respect, Danyl, your post reveals an ignorance of the IPO process, and what ‘failed’ means in financial sector parlance.

    What’s going to happen is that a broker will act as underwriter (someone like Forsyth Barr or GSJBW, for example) and manage the administrative process of receiving share subscriptions. Part of the role of the underwriter is to (duh..) underwrite the deal.

    So, if you’re selling $100m in equity at $1 a share, but only get $90m for 90m shares in investor subscriptions, the underwriter has to come up with the other $10m for 10m shares. The company goes public as planned, and recieves $100m.

    This example would fall within the definition of ‘failed’, but the company still has the $1 a share it asked for.

    Once the company is public, the underwriter has the option of selling their shares in the open market if they wish to do so, but of course it would probably be at a loss.

    Comment by Phil — July 16, 2012 @ 2:34 pm

  42. And to add to what Phil said, if by “fail” you mean the price sinks post-listing, arguably that shows the price was set to the advantage of the companies listed and the initial subscribers overpaid. It would be a failure for the putative Mums and Dads hoping for a quick profit, but not from the POV of the government’s finacial acumen. Because if if the post IPO price went up too much that might show there was value that hadn’t been captured in the IPO price.

    Comment by Stephen J — July 16, 2012 @ 3:18 pm

  43. With all due respect, Danyl, your post reveals an ignorance of the IPO process, and what ‘failed’ means in financial sector parlance.

    What you say Phil is in theory correct, but I would point you to what happened with the BP privatisation in Britain in 1987. The stockmarket crash intervened between the price being set and shares put on offer and actual listing date. The underwriters (led by one Goldman Sachs IIRC) squealed blue murder and basically tried to weasel their way out of their obligations. The Kuwaiti Investment Office then decided to buy a significant chunk of BP shares after listing. This then prompted more outrage about foreigners and strategic assets so ultimately the British government bought back the shares from the KIO who made a tidy profit. It was one of the more outrageous examples of “privatised profit, socialized losses” I can recall.

    Incidentally, in the example you cite Danyl’s point about the danger of a failed IPO would still stand. As well as the underwriters those who purchased shares at the time of the float would probably be sitting on a loss.

    Comment by TerryB — July 16, 2012 @ 3:21 pm

  44. Here’s a link to my previous post

    http://www.nytimes.com/1987/10/27/business/market-turmoil-bp-delay-is-sought-in-london.html

    And more here http://www.independent.co.uk/news/business/bp-sale-makes-treasury-pounds-180m-1524339.html

    The bulk of the Government’s BP holding was acquired in 1987 as part of the dramatic manoeuvres surrounding the pounds 7.25bn sale of its 31.5 per cent remaining stake in the company, for which Rothschild, was the government adviser.

    The October crash occurred after the underwriting but before the sale went through, leaving the City facing large losses as the BP price plunged.

    But Lord Lawson, then Chancellor, insisted on pushing ahead against opposition from the City, which invoked a force majeure clause to void the underwriting.

    However, he agreed to a “safety net” to prevent further falls in the BP price, as a result of which the Bank of England picked up 39 million part-paid BP shares, for pounds 27m. Fully paid, the shares would have cost 330p. The Treasury also held on to a further 68 million shares issued to it at the time by BP at the same price. The holdings the Government retained were worth about pounds 330m when fully paid.

    Comment by TerryB — July 16, 2012 @ 3:25 pm

  45. Hmmm, interesting article here suggesting that electricity demand from consumers is topping out… http://www.interest.co.nz/news/60164/govt-prepares-sell-49-3-state-owned-electricity-gentailers-where-demand-electricity-headi

    Comment by Stephen J — July 16, 2012 @ 4:21 pm

  46. What Shearer & Norman et al need to do now is to somehow superglue the JP Morgan & Barclays scandals to the whole thing.

    This might help: Goldman-Sachs is implicated in a vast bid-fixing scam in which US cities and states seeking finance were screwed on their interest rate, while bankers and corrupt brokers split the difference. The question is: will they pull a similar scam here, and fleece the kiwi taxpayer too?

    Comment by Idiot/Savant (@norightturnnz) — July 16, 2012 @ 8:01 pm

  47. I don’t believe that a government owned Telecom would have acted any differently to the government regulated Telecom we had/have.

    Actually when the network was an SOE, Telecom had one of the best POTS infrastructure setups in the world, though admittedly, that was inhereted from the former setup rather than as a result of corporatisation.

    It might not have been terribly effective from consumer services perspective but in terms of network efficiency and resiliency, it was world leading.

    What corporatisation did do was allow the business to operate on a far more cost / customer focussed fashion.

    Comment by Gregor W — July 17, 2012 @ 1:10 pm

  48. Hey ho! Our thing is really really great but no-one can use it! Huzzaah!

    Comment by merv — July 17, 2012 @ 1:20 pm

  49. @ garethw #40 – Thanks🙂 You’ve clarified my misunderstanding of Danyl’s vocab. You are quite right that govt should include future asset sales and lost future dividends in their future *budgets* – as you say, to not do so would be misleading.

    I thought when Danyl said National had already *booked* the asset sales, that National had already entered the one-off revenue from the sales in their accounts, which are supposed to record what has been done, not future plans.

    Good to know Key & co. aren’t engaging in rampant accounting fraud, at least just yet…😉

    Comment by bob — July 17, 2012 @ 1:58 pm

  50. I think the time has come to disassociate ourselves from the British Crown by becoming a Republic because the whole British system is in disrepute in my mind, particularly when it comes to the Governor-General who is supposed to represent the Monarch and provide a checks-and-balances system, but this doesn’t work in practice.

    I think New Zealand should have a referendum on whether or not to become a Republic, and whether or not to let the Maori Sovereign lead us in the same or a similar way as the British Crown has held a claim over our territory. The proper establishment of a Maori Crown would serve to stop disputes in terms of water, etc, because the Maori Crown would own the water and have a right to have some of the monetary proceeds of that resource but it wouldn’t have the power to stop the government from selling assets that use that resource.

    Comment by Daniel Lang — July 17, 2012 @ 2:10 pm

  51. Hey ho! Our thing is really really great but no-one can use it! Huzzaah!

    Sort of.

    It was designed exteremly well by engineers with entirely predictable results; 5-9 resilience with a 3 week wait time to get your phone connected.

    NZ’s long-loop POTS system was built for voice. Retail data services did not exist.

    However, failure to anticipate the uptake of retail data services and adjust the network topology accordingly was Telecom’s principal failing of the 90s.

    Comment by Gregor W — July 17, 2012 @ 2:23 pm


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