To sell or not to sell?

by The Listener / 10 May, 2013
Whatever your view, the political games are likely to cost taxpayers dearly.
The winding path leading to Mighty River Power’s sharemarket debut has had so many twists and turns that it looks like a braided river.

The partial asset sales will reduce our dependence on overseas capital. Photo/Getty images.

The sale process has been bruising. The question of where to from here for the share sales will be answered in the coming months, and will most likely be what the next general election is fought over.

Those against the partial sale argue all New Zealanders own the businesses, which generate good returns, so we collectively should hang on to them. At the same time, some say those profits are too good, so we need regulations to reduce returns, effectively giving a tax cut, or paying a dividend, to consumers.

The “pro” argument is that the share sales are needed to free up capital, allowing us to buy other government assets, reduce debt and boost our productive capacity by feeding the New Zealand capital markets, which are starved of high-quality firms.

Our sharemarket has generally performed poorly for more than 25 years, since the 1987 crash. Because two generations have been scared off investing in shares, we now have 10 times the capital sunk in housing (more than $600 billion) than in (mostly) productive investment through the stock exchange.

Those who argue that our energy companies and others will simply end up in the hands of foreigners if we sell some of their shares and list them on the stock exchange should ask where the capital is coming from to buy all the houses we own. The answer is overseas banks.

New Zealand also needs to eliminate its government deficits (as it did during the good economic times of last decade) while investing in new infrastructure. This includes the hundreds of schools Auckland will need over the next 20 years to educate its increasing number of children and new hospitals to treat our ageing population.

The capital for those will largely come from our taxes, plus whatever money New Zealand is allowed to borrow, based on its credit rating, and possibly a bit from private investment.

To me, it’s logical to sell one asset to buy another. When we buy another house, most of us sell our existing one. Even if we’re emotionally attached to our current abode, reducing debt wins out.

In any case, the last thing you’d want to do is reduce the value of the asset you’re trying to sell. This is why I wonder whether Labour and the Greens actually thought through what the impact of their policy announcement would be on the potential value of the shares.

If it was a case of sour grapes, that’s a real worry. All political representatives – whatever party – are responsible for looking after our interests, including the assets we all own.

Any actions reducing their value go against our best interests. It means we have to borrow more or pay more taxes to get those schools and hospitals.

The policy announcement had a short-term price impact on fellow power companies TrustPower and Contact Energy. But both offer strong dividend yields and haven’t suffered irreversible damage to their value, and like Mighty River Power, should remain solid investments. But future policy changes will remain a cloud overhanging the electricity industry.

The Mighty River Power strike price wasn’t set by the time the Listener went to press, but the Labour-Greens policy is likely to have increased both the potential capital gain and the dividend returns, by depressing the sale price. So taxpayers get less of a return and investors potentially more – exactly what the Labour-Greens wouldn’t have wanted.

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