Mixed Ownership Model Bill – Green Party Minority Report

Introduction
The Green Party is opposed to the Mixed Ownership Model Bill and recommends the Bill does not proceed.

Our opposition to the Bill is based on:
- The Government accounts being permanently worse off as a result of the mixed ownership model
- Flaws in the Government’s arguments in favour of the mixed ownership model
- Negative impact on New Zealand’s external debt situation as a result of the mixed ownership model
- Reduction in Government income as a result of the mixed ownership model
- Higher power prices as a result of the mixed ownership model
- Mixed ownership model limits the ability to invest in renewables
This report also sets out what we see as the alternatives to the mixed ownership model.
Government accounts permanently worse off
BERL research, commissioned by the Green Party, shows that a programme of asset sales to finance the construction of new assets leaves the Government accounts permanently worse off (compared to the baseline) in terms of Government debt, debt ratio, net worth and total assets.

In the short term the option of selling investment assets to fund the construction of new assets leaves the Government’s accounts in a worse situation compared to the baseline.

- The annual deficit increases as a result of the loss of dividend revenue, with no compensating decrease in spending.
- Assuming that the increased deficit is funded out of ‘cash reserves’, total assets decline. This leads to a deterioration in net worth.
- Debt remains the same, but the debt ratio increases as a result of the decline in total assets.

In the long term the annual deficit returns to baseline, but net worth, total assets and debt ratio are worse than baseline. The short-term impact on the financial surplus is not recouped in subsequent periods, leaving this permanent impact on net worth and total assets.

Flaws in Government arguments in favour of mixed ownership model
We asked BERL to examine the various arguments the Government has put forward for the asset sale programme.

BERL determined that while each of the arguments had some merit they did not rely on the adoption of the Mixed Ownership Bill.

Improvement in the pool of investments available to New Zealand investors
Households (colloquially termed ‘mom and pop investors’) could be attracted to direct investment opportunities in government bonds or the SOEs issuing bonds. These investment vehicles could be in the guise of infrastructure or national development bonds directly targeted at the retail investor. Therefore domestic investment options could be made available that do not rely on selling the assets.

Allowing mixed ownership companies access to capital to grow
The objective of allowing mixed ownership companies access to capital to grow without depending entirely on the Government need not require a partial sale of equity. To access capital, mixed ownership companies need to attract funds from the private sector. This can be done, subject to the maintenance of a prudent debt-to-equity ratio, without the reduction in an existing owner’s equity stake. Accessing funds to finance growth, through the use of debt instruments, is standard practice in the business sector.

Allowing for the external oversight of companies
This objective could be achieved through alternative means such as the appointment of independent directors, directors/Boards reporting to a Parliamentary committee (as opposed to Ministers), or the setting of clearer, transparent directions from shareholder Ministers as to market-related objectives. This objective does seem in contradiction to the stated expectation of a gain on sale of these assets (as forecast in the 2012 Budget Policy Statement). Were these companies’ performances below par and in need of sharper discipline, such a gain on sale would seem unlikely.

Negative impact on New Zealand’s external debt situation
As noted in the 2010 Budget, “New Zealand’s largest single vulnerability is now its large and growing net external liabilities. New Zealand now owes the world $168bn, or around 90% of (annual) GDP.”

The BERL report stresses the difference between the Government’s debt and the external debt in any discussion in regards to the Government’s financial situation being used as justification for a programme of partial asset sales.

While the Government has stated that New Zealanders will be at the front of the queue to purchase the investment assets being sold, some assets may be sold to overseas investors. Consequently, the portion of company earnings (dividends and profits) that relate to overseas investors will be an outflow (or payment) on the external accounts. This would ultimately represent, and assuming all else unchanged, a permanent deterioration in the external deficit and the level of external debt.

Further, while the initial offering may be directed towards domestic purchasers, future private share transactions could increase the portion of shares (and earnings) in overseas investors hands. Such an outcome would lead to a further deterioration in the external deficit and external debt position.

Reduction in Government income
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. That is a low estimate, based on the average dividend return of $258 million in the past 6 years from the assets the Government intends to sell. 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. This is more than four times higher than the Government's cost of borrowing at 4%.

Higher power prices as a result of the mixed ownership model

On average, privately-owned electricity companies charge 12% more for electricity than publicly-owned ones. Privately-owned electricity companies have complained to publicly-owned ones that they are not charging enough for the privately-owned companies to make a profit and the CEO of Contact Energy has said that electricity prices need to rise for private investors to make a profit.

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%. 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.

If the assets are sold to private, often overseas, buyers it is likely they would demand higher prices. The boards of companies would be legally required to act in the best interests of the shareholders, and their rights to a higher profit would have to be respected. To make higher profits, they would charge higher electricity prices.

Mixed ownership model limits the ability to invest in renewables
In a world that is carbon constrained and economically volatile now is not the time for New Zealand to sell off our highly successful, resilient renewable energy powerbase. These are publicly owned entities that have been grown and owned by New Zealanders who have spent years nurturing and developing the expertise that could be the cornerstone of a cleaner, smarter, robust economy.

The Government is selling our best opportunity to become large-scale exporters of renewable energy technology. Private sector imperatives will likely delay and deter the switch to increased renewable use, which could further affect New Zealand's chance of becoming a cutting edge developer and exporter of renewable technologies. Prized energy assets like Manapouri power station could also be sold off under the legislation into full
foreign ownership and control.

There are huge risks in further binding our economic and energy fortunes to the whims and profit margins of overseas investors. It could mean that we will lose the power to direct these energy companies towards cleaner energy technologies and to make decisions that will determine our country's overall energy strategy and mix. With the right vision and political will, we can keep their renewable energy know-how and innovation in New Zealand, capitalising on the potential to create thousands of green, highly paid jobs; insulate our economy from the volatile fossil fuel markets; and build a more sustainable future for our country.


Alternative Solutions

Returning to monopoly public ownership of the main generating capacity
This could be done under tight oversight and control to ensure efficiency, give it a responsibility for energy conservation as much as new generating capacity, require it to charge average costs or below for a base usage allocation for households, and require a proportion of small-scale sustainable generation such as from wind and tidal sources which could come from independent providers.
Feed-in tariffs for firms and households producing their own electricity from small-scale renewable generation should also be part of the mix. The monopoly public generator could also act as default retailer to ensure there are reasonably priced services for low income and other households which may be considered undesirable to for-profit retailers.

More energy-efficient power production
New generating capacity should be required to be increasingly renewable, and the need for new capacity should be as far as possible replaced by conservation measures. New advances in technology can save hugely in power costs using smaller and more efficient and decentralised power plants which are also more resilient to natural disasters such as earthquakes.

This seems unlikely to happen with the only incentives being a weak ETS scheme which pushes up power prices and creates an incentive for companies to charge more not save more. Regulation is required to force companies to explore other options which will save the country drastically in the long run.

Investment in Green Technology and Jobs
The Green Party and many environmental NGOs have strongly advocated for an alternative vision that creates decent jobs, adds resilience to our economy, and protects our natural environment. By retaining ownership in our energy companies, we could focus their profits and research and development investment on renewable energy opportunities.

The global renewable energy sector is growing rapidly into a market worth up to $800 billion by 2015. These power companies have the expertise and the capital to take advantage of this growing industry and create tens of thousands of jobs here in New Zealand. Privatisation will end that opportunity to create investment and employment opportunities in the clean energy revolution.

National energy strategy
The development of a comprehensive national environmental strategy around power generation is necessary to deliver a positive environmental future. A move to privatise the four energy companies will compromise New Zealand's ability to implement such a strategy in order to give our children the environmental future they deserve.

The SOE Act provides a ready-made vehicle for the Government to roll out renewable energy and energy efficiency solutions that may not be commercially viable for a profit-driven energy company but may deliver net benefits for the country as a whole. Possible examples include smart meters, electric vehicles and infrastructure, small-scale renewable generation, and bioenergy.

Authorised by Dr Russel Norman, MP, Parliament Buildings, Wellington

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