State-owned assets or liabilities?

by Jane Clifton / 08 September, 2012
When is an asset really a liability – when it’s state-owned?
State-owned assets or liabilities - Paula Bennett cartoon

When John Banks said recently, with shiny-eyed sincerity, that he believed in Genesis, he might have been talking about the power company rather than the creationist doctrine. The Government has certainly invested a religious faith in the ability of our energy companies to lead us to the shining path of redemption – economic, if not spiritual. Unfortunately, following the plan as laid out in the original Book of Genesis Energy and the Books of Mighty River, Meridian, Solid Energy et al has proved to require more than a smidgen of faith in the supernatural.

Whichever deity is in charge of partial privatisations has sent everything short of a plague of locusts to test the true believers. Although National still keeps the faith, the past week’s slew of inconvenient developments on the way to the promised land of the Mixed Ownership Model (Mom) has had our prime minister and finance minister subtly hedging their bets about the nature of the afterlife. The first Mom might or might not now take place this year, or next, is John Key’s new position on the article of faith. And apparently if, Momless, we now need to borrow several billion dollars more, it won’t be the end of the world, after all. We will still be below the Pigs ratio of scary borrowing, according to Bill English. This is pre-U-turn talk, and isn’t it lucky politicians are fluent in it? Never mind the traditional balance-sheet arguments, on the political ledger the entries under More Trouble Than It’s Bloody Well Worth are running to several pages.

Perhaps the most frustrating thing about the ceaseless pandemonium surrounding the partial float process is that it is now becoming clear that opponents styling it as “asset sales” may have been even more misleading than first thought. Are these companies really assets, or liabilities-in-the-making? The first exhibit here is Solid Energy, which is now in such a pickle it has been removed from the Mom schedule, as a result of a massive drop globally in the price of coal. You couldn’t give it away. Now we realise what a potential drain it is on the public purse, do we really want to own it? Yet who would buy it? Second is Air New Zealand. It’s a cracker company, but the airline business globally is a nightmare, and however well-run, our carrier is vulnerable. Aren’t we best off making it mostly someone else’s nightmare while we still can? It’s worth re-examining TVNZ in this light as well. It’s not on the Mom schedule, but rapid changes in viewing habits could soon make its commercial model obsolete, so it, too, could turn into a liability rather than an asset.

A third pestilence in the updated Book of Genesis et al is the global financial crisis. Meridian, for instance, faces the potential blow of losing a whole aluminium smelter as a customer. In fact, such a move could prompt tremors throughout the entire electricity sector. There is also a limit to how much growth the companies can achieve in New Zealand, because there is a limit to how much the domestic and business markets will bear in the way of price increases (although one wouldn’t think so to look at one’s monthly power bill). One of the biggest travesties of this whole situation is that the companies lack the capital to optimise their higher-growth overseas energy escapades. These companies are not necessarily the forever cash cows we have complacently imagined. They need feeding to produce serious rewards, but the Government, through Mom, is just using them for emergency money-extraction.

A fourth category of mortal peril comes under the heading A River Runs Through It. Sir Geoffrey Palmer introduced the expression “irreducibly pluvial” to the New Zealand lexicon. A fair update of this would be
“irreducibly litigious”. Where there’s water, there’s a canny Maori lawyer. Salty or fresh, falling from the sky or coursing though the landscape, water and its Treaty governance issues are going to dog most of these floats. And if you can get your head around this, water could sink floats. To no one’s great surprise, the Waitangi Tribunal has ruled that Maori are entitled to a say in perpetuity over how water is used. This is not a principle quarantined to Mighty River, the first float scheduled. The Maori Council might be prepared to do a share deal or even, as the Maori Party is wishfully portending, a shares and water-governance deal. But the council itself is divided, so that whatever it decides, it is likely to be swiftly ousted by dissidents, who will try to revisit the agreement, including by further court action.

Prospective investors will be put off by the furore, anxious as to what any water-governance rights might mean in practice. So the float might flop. Given a militant new muscularity around the Cabinet table about “progress” and “getting things moving”, the Government must be awfully tempted to bulldoze on through, relying on the probable majority of public opinion that grows resentful when Maori claimants threaten to interfere with government business – even if this time they’re interfering with government business most polled voters object to. But inflaming racial disharmony is its own punishment. As former Act leader Don Brash found out, you might get a temporary high from it, but long term it doesn’t stand a party in good stead. Or a country. Injecting a final Old Testament flourish to proceedings, last week brought apocalyptic visions from the dark canyons of KiwiRail. The tracks are so run down, said a leaked secret engineering assessment, that parts of the network are, or will soon be, unsafe.

The Opposition trumpeted this as evidence of the Government’s criminal neglect of the state asset. But actually, KiwiRail is a state liability, into which the Government is having to shovel intestine-shrivelling quantities of money. Labour made the controversial decision to buy the network back, arguing it was important national infrastructure. But no matter which way the numbers have been shuffled since then, it has remained a financial sinkhole. The company tried to save money by buying cheap Chinese trains, but they keep malfunctioning – although every cloud … rail employees are now happily busy as full-time carriage repairers. All of which underlines that sometimes an asset is really a liability wearing a lot of make-up. Putting aside ideology, there are still about as many reasons to sell or partially float many of the state’s assets as there are to retain them in their entirety. But the recent adventures in the realm of Mom suggest we need to take a clearer-sighted long-term look at which side of the ledger these companies really lurk.
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