Will privatising energy companies improve the Govt’s debt and deficit position? No.

Benmore dam up for sale?

The National Government has used the government deficit and debt to justify the privatisation of assets. As I pointed out in an earlier blog, the deficit and debt problem has been made much worse as a result of this Government’s very poor revenue and spending decisions.

But does privatising the assets really help the deficit and debt anyway? The short answer is no and the reason is very simple.

Our energy assets get very good returns and the Government can borrow very cheaply. This means that the return on the Government’s investment in these companies is much higher than the cost of government debt. So selling assets to reduce debt actually costs the Government money.

Treasury’s Budget Policy Statement 2012 (page 6) quantifies the cost to the Government of proceeding with the partial privatisation at $94M per year by 2016.

They come to this by projecting that lost dividends from the partial sale of the companies will be about $360M and the reduced interest payments if all the proceeds were put to paying off debt would be $266M.

So the privatisation will actually make the deficit worse because the lost dividends are greater than the reduced interest payments.

But it is actually worse than this. If you look at the assets from the point of view of an investor, then the return on the assets is a combination of the dividends they pay out and the appreciation in the value of the assets. This is called Total Shareholder Return. This is the standard approach taken by the Crown Ownership Monitoring Unit in Treasury to measure company performance.

If you take this approach, as the Minister for State-Owned Enterprises, Tony Ryall, admitted in Parliament recently, then Genesis, Meridian, Mighty River Power, and Solid Energy returned 18.5 percent per annum on average over the last five years.

That’s a staggering return if you consider the period includes the full impact of the global financial crisis on results. From a shareholder’s perspective, our energy companies are enormous cash cows.

How does the National Government justify selling assets returning 18.5 percent a year? Not easily, as Steven Joyce demonstrates in Parliament yesterday.

Treasury estimates the one-off capital injection of $5-7 billion will enable debt to be reduced and on-going interest payments on the remaining debt to fall. But the cost of government borrowing is currently only 4%, so the lower debt payments won’t cover the lost income from the partially privatised companies.

Put it this way, if you could borrow money at 4% per annum to secure infrastructure assets returning 18.5% per annum, would you invest? It’s a no-brainer.

Or looked at from the point of view of a potential buyer of shares in these privatised companies, would you really invest in companies that have a lower rate of return than 4%? Of course not; they won’t have that low a rate of return.

It doesn’t make practical fiscal sense to privatise these assets. It only makes ideological sense.

Russel

P.S. To make your own submission on the Government’s legislation to partially privatise the last of our best state-owned assets, click here.

[Note: This blog formerly contained an image of Clyde Dam mistakenly put up. Clyde Dam is clearly not for sale. Russ]

80 thoughts on “Will privatising energy companies improve the Govt’s debt and deficit position? No.

  1. definitely agreed but a word of warning.
    Clyde Dam is owned by Contact Energy so unfortunately this is already overseas owned. Should take it down before DPF sees it!

    Like or Dislike: Thumb up 8 Thumb down 2 (+6)

  2. Russel – you’re in lala land if you beleive the generating companies really return 18.5% per year.

    And if we suspend reality for a minute and enter your world, the massive valuation gains you claim will never benefit the NZ public under your plan to never sell. Those gains won’t benefit a single Kiwi by a single dollar.

    In fact under your plan not to sell, and using your methodology for “return”, it makes not a single dollars difference to any Kiwi whether the valuation goes up by 0%, 5%, 50%, or 500%, or down to nothing.

    It’s like trying to claim NZ gets a huge financial return from National Parks because their land value is increasing.

    If we will never sell, paper valuations are irrelevant.

    Because any increase in valuation is worth nothing, unless you plan to sell.

    Like or Dislike: Thumb up 19 Thumb down 4 (+15)

  3. PMSL…. the Clyde Damn was privatised in the 90’s and is owned by contact energy. And you expect people to take you seriously!

    Like or Dislike: Thumb up 17 Thumb down 3 (+14)

  4. Absolute nonsense Russel… you are comparing accounting profits with cash interest payments. If you compare cash dividends to interest the government is better off – and more so when you include the new tax the minority shareholders are going to have to pay. For example, if Mighty River is sold for $1.8 billion, and as a result the government forgoes half of the $95 million in dividends that Mighty River paid last year, the government is down about $47m in lost dividends, but up about $16m in new tax, and also up another $72 million in interest payment reductions. The net result is an increase in Government cashflow of about $41m pa… as well as still owning the controlling share of Mighty River.

    Like or Dislike: Thumb up 9 Thumb down 3 (+6)

  5. @Jono 4:36 PM

    …and also up another $72 million in interest payment reductions.

    Um, where did that figure come from? Out of your arse?

    If you are going to put up estimated figures, at least link to something to verify them.

    And in any case, as a Green I am more interested re the next 50 years than the next 2 years, which is where the Nats are coming from on this. Because all they care about is making some quick bucks to try to win the next election, rather than long-term economic and ecological sustainability.

    Like or Dislike: Thumb up 8 Thumb down 8 (0)

  6. I certainly do not plan to sell. So I wouldn’t bother with the “Total Shareholder Return”… it is really quite irrelevant though. The “return on investment in terms of the “Treasury’s Budget Policy Statement 2012″ is really quite adequate…. and there is this OTHER problem with the plan.

    That would be the problem that the reason we are in this hole to start with is that we are trying to keep our taxes, particularly our taxes on the wealthy and our Capital Gains taxes, below even the mean of the OECD.

    Running deficits every SINGLE year to do that too. So this one shot short term fix doesn’t do anything but mask a completely unsustainable policy favoring the wealthiest people in New Zealand.

    You want to tell me that in less than 5 years we won’t be in EXACTLY as much financial stress as we are now because our gozintas still won’t match our gozoutas?

    Like or Dislike: Thumb up 4 Thumb down 4 (0)

  7. bjchip gets his finance really wrong by saying “So this one shot short term fix…”

    Because unlike EVERY other investment, when you pay down debt, you save the interest payments, year after year, every year, forever.

    That’s forever.

    It’s guaranteed 100%.

    And 100% risk free.

    If you pay off debt, you are guaranteed to have no interesst payments on that debt this year, next year, and every year – forever and ever.

    With zero risk of that changing. Zero

    That’s something that no other investment can ever do.

    BJ – you normally have intelligent arguements, but saying that selling assets to pay debts is a one term fix shows complete ignorance of finance – when it’s a lifetime fix.

    Like or Dislike: Thumb up 4 Thumb down 5 (-1)

  8. I would have thought people in this country would understand this. So who are the people who fail to understand the importance of holding onto assets that rise in value, apart from photonz?

    Investors are told to hold stocks for the long term, this regardless of the fact that dividends are often lower than interest returns offered by banks or via corporate bonds.

    As Treasury put it, why sell assets generating returns at the debt cost level, it achieves nothing to reduce the budget defcit – it only reduces the value of assets held by the government over the long term.

    Some say what does this matter, if the asset is not going to be sold – well ask the bank that lends to a small business owner against their home, ask a farmer who borrows against the rising value of their farmland. The rising value of the home or farmland is vital for business financing in New Zealand – it is also the same for a government borrowing after a GFC.

    After selling down our assets we will not be able to borrow as we have done this time, the next time we get into a fiscal crisis.

    Like or Dislike: Thumb up 4 Thumb down 2 (+2)

  9. SPC,

    You are making a wrong assumption in regards bank lending to the private sector versus lending to the state.

    When a bank lends you or me money against a property we effectively “sell” (as collateral) our property to the bank. No principal or interest payments to the bank and they foreclose on the property asset.

    Lending to the state against a property asset is completely different as the state cannot “sell” or use the physical asset as collateral.

    All they can do is use “potential” future earnings generated by the property as loan collateral.

    Different kettle of fish in regards colleteral used to fund private and public debt.

    If an asset is never to be sold, the “loan” value of the asset can only ever be, the ability to generate revenue from the activity it was designed for.

    Not to be confused with the “replacement” value which is the cost to replace the asset in todays economy.

    With tightening economic conditions and FALLING house and farm asset values, many (state or private) will find the value of the asset (private debt) or dividend cash flow (state debt) they have borrowed against to be less than the the size of their debt.

    That will be the real problem for NZL both state and public debt.

    For if the state revenue streams are reduced through less tax and dividend cashflow, the Greek scenario will play out here.

    Like or Dislike: Thumb up 2 Thumb down 0 (+2)

  10. Photonz

    You make a serious mistake if YOU think that changing the debt without changing the behaviour that led to it, is going to make a lick of difference. What you describe as a “long term” fix won’t last 10 years… might not last 5.

    You can’t just sell assets. You have to raise revenues and cut spending at the same time.

    Nor can you just “cut spending” because this is a democratically elected GOVERNMENT, and our spending levels aren’t ridiculous given services provided and required. Anything that gets “cut” is going to be back in less than a decade.

    You are looking only at a small bit of the picture and a short bit of time and money only. This is National’s problem here… no consideration of people, and it leads to bad public policy.

    Moreover, you are completely ignoring what Treasury said.

    This is an ideological sale Photonz, no benefit comes to the people of New Zealand from it, only the wealthy in NZ do well out of it – because it masks the problem that the favoritism shown them over the years has created… for a few more years.

    Then the problem gets worse.

    To fix the balance WE have to pay the taxes to do so. That means more money has to come out of the top… like it does in the REST of the OECD. …because the folks at the bottom ain’t got no more to give.

    BJ

    Like or Dislike: Thumb up 5 Thumb down 2 (+3)

  11. BJ,

    ….because the folks at the bottom ain’t got no more to give.

    Similarly there are not enough “folks” at the top to make up anything near the shortfall.

    So without a massive increase in revenue from elsewhere I dont think the NZL state can go on increasing taxation levels for the small volume of “rich pricks”. The cashflow wont be big enough.

    So reducing expenditure (with a similar reduction in borrowing) is about all that is left.

    And no, I dont think asset sales are a good idea simply as it reduces the ability for the state to borrow against revenue streams.

    There is a case for private business to free up capital, to invest into the business, by selling assets (usually sell and leaseback on property) but for the state it is not so.

    As explained in my earlier post, the state can only borrow against revenue streams, not the physical asset. The smaller the ownership by the state for that asset, the smaller the revenue stream, the smaller the loan value of that asset.

    Like or Dislike: Thumb up 3 Thumb down 0 (+3)

  12. Gerrit, I am not sure that there is a direct connection to the revenue stream from the asset and the amount that can be borrowed against it – by a government. The government has other revenue streams, the lender simply needs the collateral to secure the higher level of lending. That collateral is the value of the asset that can be sold – and thus its market value (the market often values on future revenue streams not current ones etc and otherwise on security of the business – such as a cost plus utility).

    Like or Dislike: Thumb up 0 Thumb down 0 (0)

  13. Similarly there are not enough “folks” at the top to make up anything near the shortfall.

    I think that’s not as likely to be as true as it is assumed to be… I think that the rorting through financial structuring and selective income reporting is probably concealing more than people realize. There is (to me) a bigger “apparent” disparity in wealth than reported.

    …but I discussed cutting spending AND raising taxes.

    The problem there is that people at the bottom feel… RIGHTLY… that the people at the top are getting everything and paying nothing, while they are being required to give up everything to obtain nothing.

    Societal contracts like that DO NOT work.

    If you want people at the bottom to give something up, the people at the top need to do EXACTLY that. The underclass here feels NO responsibility to make sacrifices to balance the budget because they see quite clearly that the wealthy are getting every cent of every sacrifice the poor have already been forced to make. The budget is still not balanced and taxes are still low.

    So the poor feel absolutely no moral requirement to deal with it. Whatever they can get or take, they will… just like the rich pricks do.

    I can’t really blame them.

    So maybe it is time to have a couple more brackets. One for the folks over $110K another for over $280 (arbitrarily picked… probably better to do some sort of exponential or fibonacci to pick)… so that if someone on 60K is paying an effective marginal tax of 65% or 70%, the guy at the very top is paying that same effective marginal tax.

    That would go a long way to making this society more “just”… balancing the inequality creation that fractional-reserve money and unrestricted capitalism encourage.

    Like or Dislike: Thumb up 5 Thumb down 1 (+4)

  14. SPC,

    You miss the point.

    The government has other revenue streams, the lender simply needs the collateral to secure the higher level of lending. That collateral is the value of the asset that can be sold – and thus its market value (the market often values on future revenue streams not current ones etc and otherwise on security of the business – such as a cost plus utility).

    1. The market value of a not for sale asset is zero. It has no marketable value as an asset. It has a replacement value but that is different. You cannot borrow against the replacement value of a not for sale asset.

    2. The venue stream generated by the asset can be borrowed against only. If that revenue stream can bo locked into place through state monopolies (guarenteed revenue streams) then the borrowing could be increased or made with lower interest rates.

    Summary, The marketable value of an not for sale asset lies not in the asset (bricks and mortar) but in the revenue stream.

    For example the North Auckland Rail line has a market value of zero. It is not for sale. The state cannot borrow against the asset as it has nil value. It has a replacement book (plant and stock but excluding land) value of B$xxxx.

    To borrow for an upgrade, the state will have to show how increasing revenue streams will pay back the loan.

    It will do this in conjunction with the upgrade to Northport and the rail line extension to One Tree Point. Plus factor in increased revenue streams from other Northland freight and passenger operations (timber, dairy, horticulture, aqua farming, tourists, etc.).

    It cannot borrow against what the rail line might be worth after the upgrade as it is not for sale and has no value as such.

    Like or Dislike: Thumb up 2 Thumb down 1 (+1)

  15. BJ,

    The problem there is that people at the bottom feel… RIGHTLY… that the people at the top are getting everything and paying nothing, while they are being required to give up everything to obtain nothing.

    Similarly

    The problem there is that people at the top feel… RIGHTLY… that the people at the bottom are getting everything and paying nothing, while they are being required to give up everything to obtain nothing.

    We need to find the exceptable level in inequality. Not sure where that lies but while wrong at present, we dont seem to want to address what the level might be.

    Like or Dislike: Thumb up 2 Thumb down 0 (+2)

  16. BJ says “…because the folks at the bottom ain’t got no more to give.”

    With WFF, 40% of people pay ZERO income tax.

    BJ says “What you describe as a “long term” fix won’t last 10 years… might not last 5.:

    Wrong – it’s forever. Once you pay back debt, it’s gone. You pay no interest – forever. And the hundred years after forever you still pay no interest.

    That’s why your claim that it’s a one time fix is wrong.

    Of all types of investment, none is 100% safe, or has a 100% guarantee, year after year, every year into the future, like paying off debt does.

    BJ says “only the wealthy in NZ do well out of it ”

    A large part of the private holdings of energy companies will be bought by the NZ Super Fund, ACC, pesnion funds, and most Kiwisaver funds will buy some.

    So people who will benefit will include
    – every New Zealander who retires.
    – 1.8 million New Zealanders who claim ACC every year
    – 2 million New Zealanders who have Kiwisaver plans.

    But in your book these millions of Kiwis are all rich pricks.

    Like or Dislike: Thumb up 1 Thumb down 2 (-1)

  17. SPC says “Investors are told to hold stocks for the long term, this regardless of the fact that dividends are often lower than interest returns offered by banks or via corporate bonds.”

    But if they could never sell those stocks, then any rise in valuation is worthless to them. The reason they do this, is because they WILL sell.

    That’s the farce of what Russel is trying to claim – some massive rise in value that under his plan, no one will ever see a single dollar of benefit from.

    Under the “don’t sell” plan, it is totally irrelevant if the generating companies are worth $1 or $1 billion dollars – it makes not a single bit of difference to any New Zealander.

    It doesn’t matter what happens to the value of the companies – It won’t pay for a single extra childhood vaccination, or a single weeks unemployment benefit. There will be ZERO benefit to anyone from rise in book value.

    And you are confusing the way you borrow to buy a house and the way a govt borrows. Security for govt debt bonds is the govts ability to TAX people and companies.

    Govts do not put up assets as security. If they did, German Banks would own Greece.

    Like or Dislike: Thumb up 1 Thumb down 2 (-1)

  18. No Photonz, you mislead through the nose. If you do not correct the situation that caused the debt in the first place, IT COMES BACK!!!

    Which means that the gozintas have to match the gozoutas. They do not match now. Not even close.

    THIS Government wants to match ONLY by cutting gozoutas. It cut gozintas from the wealthy earlier. You focus on WFF and I say WTF!!! That disappears over 120k ANYWAY. The irrelevancy piled on the inaccuracy is astoundingly reminiscent of the denialists at the end of THEIR rope.

    Fix the income part of this FIRST Photonz… don’t tell us we have to sell the silver while people on 500k incomes pay less than the people on 80K.

    Sell THAT somewhere else mate, it ain’t worth what you’re asking

    Like or Dislike: Thumb up 3 Thumb down 2 (+1)

  19. BJ says “If you do not correct the situation that caused the debt in the first place, IT COMES BACK!!!”

    No – that’s new debt. Once existing debt is paid off it’s gone – forever.

    It’s not that complicated.

    Like or Dislike: Thumb up 3 Thumb down 5 (-2)

  20. The actual facts are

    1. government debt is compared to GDP.
    2. government debt is compared to its level of ownership of assets.

    This latter factor is further assessed as to public debt compared to the value of the assets that were saleable and the capacity to increase earnings from those assets to increase their market value.

    3. the capacity of the government to meet debt costs and still pay its way.
    4. the value of existing hydro power generation assets increases as more expensive generation is relied on to meet power demand. While the government owns these dams they receive the benefit of the rising value of these assets.

    For example someone places a farm in a family trust, thus with each generation there is no sale to a new farmer, just a continuing family operation. Despite this the farm trust simply borrows against the rising value of the farmland asset to extract a return from the rise in asset value. The same thing would happen if the government continued to own power generation assets.

    The lender to government would take a commitment from government to the local population not to sell its assets to pay down debt as a commitment to manage its budget in other ways.

    Such as introducing a CGT.
    Water charging in rural areas as well as for industrial users.
    A carbon tax.
    An earthquake levy.

    Maybe end the borrowing of money to pay people a Kiwi Saver tax credit each year. Leaving only the employer contribution and the $1000 start-up.
    Look at placing a means test on payment of super to those still working full-time over 65.
    Introduce a compulsory deduction of 2% from employees and employers for the NZSF to save for the increase in future cost of tax paid cost of super.

    Selling assets is simply a delay to making the hard choices and such avoidance makes our future position more tenuous – this is compounded
    by not receiving the value from the increase in value of power generation assets.

    Like or Dislike: Thumb up 4 Thumb down 2 (+2)

  21. SPC says “While the government owns these dams they receive the benefit of the rising value of these assets.”

    No. While they own them they receive ZERO benefit from rising values.

    They only receive that benefit when they stop owning them – when they are sold.

    If they are never sold, there will never be so much as a dollars benefit to a single Kiwi from rising book values – whether they rise by 1%, 100% or 1000%, or go down by 50% – it doesn’t make a dollars difference to anyone.

    Like or Dislike: Thumb up 3 Thumb down 4 (-1)

  22. SPC

    Despite this the farm trust simply borrows against the rising value of the farmland asset to extract a return from the rise in asset value. The same thing would happen if the government continued to own power generation assets.

    The difference, being studiously avoided, is that IF the family trust does not pay interest and principal back to the lender, the lender will foreclose the farm and sell it recoup the loan.

    One cannot foreclose on a state asset thus borrowing against a state asset is not possible.

    I cant put it any plainer.

    Contact Energy could, as outright private owner of the Clyde Dam, borrow against the asset. Failing to repay the interest and principal would see the dam revert to the lenders ownership. Even though it is not for sale it has a market (saleable) value plus a saleable revenue stream.

    State owned assets are not able to be foreclosed upon by a lender and thus have no marketable value.

    Like or Dislike: Thumb up 1 Thumb down 1 (0)

  23. Photonz overlooks that farmers borrow against the rising value of farms held in trust that are not intended for sale – simply because they can be sold and have a known market value.

    And what gerrit overlooks is that governments earn revenue from more than their assets – they also have taxation.

    It’s akin to a homeowner who borrowed against the rising value of their house 2002-2007, the lender presumes the borrower will value continuing to have a place to live and thus will simply pay more of their income in mortgage payments.

    As for governments, if they borrow against the rising value of their assets (and banks will lend because of this, even if the government does not intend to sell), then they have to economise elsewhere or raise more revenue – do the real work of budget management.

    PS What has been overlooked on this thread to date is that the government does not intend to sell assets to pay down debt but to spend the money elswewhere.

    Like or Dislike: Thumb up 3 Thumb down 1 (+2)

  24. We are smart enough NOT to agree to measures that make matters worse. Your notion that new debt is somehow different from old debt is a complete avoidance of the actual issue, which is the complete system of finance that exists in the society. Focus on a single aspect, to the exclusion of the whole doesn’t work here. We’re smarter than that. Moreover, I assure you that the effect of owing money is the same no matter whether it is new or old debt. You still have to pay it off.

    You’re still ignoring the treasury assertion. Might break even on it… surely not coming out ahead enough to actually retire a lot of debt. Second, as SPC points out, retiring debt isn’t actually in the works. Third, there is no realistic effort to actually raise revenues so we know the debt will return.

    WE KNOW THE REASONING BEHIND THESE SALES IS UNSOUND. We will NOT EVER agree to them. Nor will we agree to honor them.

    This government does not have the moral right to do what it is doing.

    I cannot put it any plainer. It is an immoral and unethical act. It is a crime against future generations. It is wrong.

    Dead wrong.

    …and most New Zealanders know that and would tell this government to stick this idea in a most uncomfortable place… this government isn’t listening because it has the best interests of the wealthiest New Zealanders exactly where its heart used to be.

    Like or Dislike: Thumb up 6 Thumb down 2 (+4)

  25. The National party cut taxes for the rich …….

    And now its going to sell what we all own ……. to the rich.

    I think perhaps that national party people hate the idea of poor people sharing in the ownership of our country’s assets.

    The National partys plan of selling our assets is akin to selling your oven to pay for takeaways.

    Its a swindle by the rich for the rich ………….

    The rest of us will end up worse off.

    The country will be worse off.

    Its that simple.

    Like or Dislike: Thumb up 5 Thumb down 2 (+3)

  26. @NZ Native.

    More like a builder selling his van and tools to avoid borrowing for groceries this month. After cutting his rates/income by too much.

    Still waiting to hear who pays to get the generators operational again, after years of profit taking, instead of spending on maintenance. Won’t be the private owners.

    Like or Dislike: Thumb up 3 Thumb down 1 (+2)

  27. @Gerrit.
    All borrowing is against income stream.
    Banks do not make their money by selling the security. Which is why it is usually a last resort.

    They like lending on assets like land because it lowers the risk.

    Try getting a mortgage with no verifiable income!

    Governments can borrow more cheaply because they can always have income.

    Like or Dislike: Thumb up 2 Thumb down 1 (+1)

  28. Kerry,

    All borrowing is against income stream.

    Yep, That is exactly the point I was making to SPC. Lenders cannot lend on a not for sale asset as coleteral, only the revenue stream.

    Governments can borrow more cheaply because they can always have income.

    No, not always true.

    If like Greece Italy, Spain, Portugal and others, the state income is lower then the state expenditure, borrowing will be far more expensive.

    Not just in the repayments but more in the loss of sovereignty.

    Plus if the borrower does not have a repayment plan in place (such as curtailing planned expenditure) the borrowings may actually dry up.

    All states should live within their means. No borrowing without an existing revenue stream to repay principal and interest. No borrowing from our childrens childrens like we are doing.

    PS Anyone picked up yet that the Clyde Dam is privately owned and Russel made a mistake to saying the state is trying to sell it?

    Like or Dislike: Thumb up 1 Thumb down 1 (0)

  29. Why are the values of the assets likely to go up? It is because the assets are expanding, as the generating companies add generation capacity in the form of new wind farms, new geothermal plant, etc and enhancing existing plant, and this increases their revenue stream and/or reduces their fuel costs. If the government/we retain these assets, then they/we will gain the increasing income from those assets. If they/we sell those assets, then that income is lost forever.

    Trevor.

    Like or Dislike: Thumb up 3 Thumb down 1 (+2)

  30. Gerrit, the government’s income is not limited to the revenue stream off assets – they have taxation. Banks lend based on the basis of the borrowers income stream and assets owned. If the former can be increased (or government spending reduced) and the latter is rising then the bank will lend more regardless of whether the revenue stream off the assets is increasing.

    As for the southern European nations their debt costs reflect the lack of assets compared to debt.

    Like or Dislike: Thumb up 1 Thumb down 0 (+1)

  31. Trevor,

    To increase the capacity of an asset to generate revenue requires capital.

    Something the NZL state does not have much off.

    What NZL is borrowing is not going into state revenue increasing infastructure.

    Like or Dislike: Thumb up 2 Thumb down 1 (+1)

  32. Gerrit, the issue was generators increasing assets to meet rising energy demand – they don’t need more capital from their shareholder/s, just finance – that means retaining capital rather than paying dividends when they expand generating capacity and borrowing the rest.

    Lenders will contribute on the basis of an expectation of increased revenues in the future. This is why asset values are not limited to existing returns, but anticipated future returns.

    However at the moment, with little growth in demand, many projects are being held over.

    “What NZL is borrowing is not going into state revenue increasing infastructure.”

    The share of tax collected to GDP has fallen about 5% under National – that is increasing borrowing.

    Like or Dislike: Thumb up 2 Thumb down 0 (+2)

  33. Companies invest in new assets all the time without borrowing – using retained profits. Power companies are no exception.

    Trevor.

    Like or Dislike: Thumb up 3 Thumb down 0 (+3)

  34. New Zealand pulled itself out of the depression, in the 30’s, before most other countries I might add, by lending capital to ourselves for employment and investment.

    Germany pulled themselves out of an inflationary spiral after WW2 by the same means.

    Argentina has done the same more recently. After telling the banks to bugger off.

    Why pay through the nose for US banks to add to the capital supply, when we can keep the repayments within NZ.

    Like or Dislike: Thumb up 4 Thumb down 0 (+4)

  35. Kerry says “Still waiting to hear who pays to get the generators operational again, after years of profit taking, instead of spending on maintenance. Won’t be the private owners.”

    What a load of utter nonsense.

    We’ve had private generators running well for years and years.

    A large number of proposed new generating projects are private companies.

    And it’s been govt departments who have got behind on investment infrastructure.

    That’s why were getting hit now with power increases – to pay for infratructure that should have been upgraded over the years, but wasn’t.

    But none of those facts fit into your preconceived idea that anything private has to be bad.

    Like or Dislike: Thumb up 0 Thumb down 5 (-5)

  36. Kerry,

    If the Clyde Dam is used as a guide, then private ownership of electricity generation assets is not one of profit taking at the cost of maintenance spending.

    Check out shareholder information and balance sheets here

    http://www.contactenergy.co.nz/web/view?opt=index&vert=in&page=/content/shareinformation

    Unless you have inside information that Contact Energy is rewarding sahareholders at the expensive of maintenance spending?

    Like or Dislike: Thumb up 1 Thumb down 1 (0)

  37. There has been a substantial increase in value of Contact Energy since it was privatised.

    There is no reason to believe that energy companies will not further increase in value in the next 15 years as well.

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  38. SPC says “There has been a substantial increase in value of Contact Energy since it was privatised.”

    Treasury records show the govt received $2.331 billion for Contact Energy in 1999.

    Adjusted for inflation, that is $3.24 billion in todays money.

    Contact Energy’s current capitalization in April 2012 is $3.36 billion.

    So the value of Contact energy has outpaced inflation by just $0.1 b or 3% over a period of 12 years (it’s share price often goes up or down more than that in a single week).

    On an annual basis, that’s just 0.24% per year ahead of inflation.

    In my book, a return of just a quarter of one percent above inflation, considering the amount of extra capital pumped into Contact from debt and reinvesting annual profits, is far from “a substantial increase in value “.

    It’s more like sinking hundreds of millions into Contact just to keep it worth the same as it was when the govt sold it over twelve years ago.

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  39. Similarly Telecom was sold for $4.25 billion twenty years ago (nearly $7b in todays money), and today has a capital value of $4.6 billion.

    Even when you add the split off lines company Chorus, the total is only $6b – still less than the inflation adjusted sale price.

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  40. Photonz, the gain in Contact Energy value factors in debt changes – if you don’t realise that debt/borrowing is factored in the valuation of companies you should not be investing in the stockmarket.

    This gain in shareholder value was alone enough to sustain the real value of the investment by CE shareholders – thus the payments of dividends ensured a return above the rate of inflation. No wonder many prefer to invest in low risk utilities rather than banks (where all interest income return is taxed).

    However, given this

    “If you look at the assets from the point of view of an investor, then the return on the assets is a combination of the dividends they pay out and the appreciation in the value of the assets. This is called Total Shareholder Return. This is the standard approach taken by the Crown Ownership Monitoring Unit in Treasury to measure company performance.

    If you take this approach, as the Minister for State-Owned Enterprises, Tony Ryall, admitted in Parliament recently, then Genesis, Meridian, Mighty River Power, and Solid Energy returned 18.5 percent per annum on average over the last five years.”

    it would seem that the SOE’s have outperformed CE, so what is the gain from privatisation?

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  41. Gerrit.

    It is just as much the requirement for SOE’s to “act like private companies” as actual privatisation that is at fault here. The delusion that the shareholder capitalist, overpaid star management and short term gains business model is the best.

    If private was really more efficient the SOE’s would not have had their dividend payments to the Government increased so the private ones could make a profit. A hidden double tax on SOE consumers for power infrastructure, we have already paid for through tax, and windfall profits for the private owners.

    There is a good argument that infrastructure such as ports, power companies and essential services such as social insurance (ACC, health and employment insurance/UB) should be run in the way that makes the rest of the economy more efficient and competitive.

    The fake competition model results in duplication, mis-investment, short term planning and rising prices, to cover the costs of pretending to compete.

    I thought the right were against hidden taxes/subsidies.

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  42. SPC,

    You need to inspect both sets of books to make sure the dividend valuations are at the same conditions.

    EG, Does the state factor in depreciation? Does the state factor in carrying replacement insurance costs?

    Does the state factor in third party liability insurance should the asset fail (eg dam bursting, fire causing lack of supply, lack of water to feed electricity to the Bluff smelter, etc.)

    Does the state retain earnings for future development such as gas exploration, retrieval and distribution?

    The 18.5% return on investment for the state assets could conversely be called ripping of the consumer by the state. How much of the 18.5% should have been retained by the state to carry out repairs and maintenance, not to mention upgrades?

    An inspection of both sets of accounts would show just where the money was going.

    At least with Contact Energy the dividend flow and share price reflects investor concerns and satisfactions.

    With the state owned asset we never know.

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  43. The State ripping off the consumer is so the “so efficient” private companies can compete.

    They even admitted it with ACC.

    ACC levies would have to be artificially pumped up or they could never sell part of the book to a private company.

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  44. Similarly Telecom was sold for $4.25 billion twenty years ago (nearly $7b in todays money), and today has a capital value of $4.6 billion.

    Even when you add the split off lines company Chorus, the total is only $6b – still less than the inflation adjusted sale price.

    Photonz1

    You forget the obvious here though.

    Consistent underinvestment, largely as a result of privatisation and the attendant cost-out (mis)management, is why Telecom is where it is today.

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  45. Why Transrail got into strife as well. That was a real successful privatization too.

    Just not for New Zealanders.

    BJ

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  46. SPC says “….returned 18.5 percent per annum on average over the last five years.”

    Yeah right. I explained right at the top why that thinking comes from lala land.

    If you believe that that asset values (for some reason no one knows of) are skyrocketing, despite their earnings being flat for years, then there’s a Nigerian Investment scheme I know of that would be a great investment for you.

    And under your “never sell” policy, it is completely and totally irrelevant if the book value of the assets go up to $100 billion, or fall to 50 cents – it will never benifit a single Kiwi by a single dollar if you never sell.

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  47. bj says “Why Transrail got into strife as well. That was a real successful privatization too.”

    Transrail in strife. Are you talking about
    1/ When it lost hundreds of millions, year after year, under govt control, even with protectionism of making it illegal for trucks to travel more than 150km.
    2/ When it still lost lots of money, under control of some of the most successful and experienced rail operators in the US and Australia.
    3/ Now, where it’s losing hundreds of millions of dollars per year again.

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  48. To quote from norightturns site …..”It is clear now that the Government has effectively cut the income tax rate and paid for it by borrowing money overseas, in large part from China. It is an act of economic treason and generational selfishness when a government has decided an already-wealthy part of the population deserves higher incomes paid for by loading foreign debt on future generations of taxpayers.
    …and we’ll be paying for it for generations to come, through debt and crippled public services.
    But then, that’s what National does: pillage the state for the benefit of their rich mates (and then use the mess it makes to justify more pillage). They did it in the 90’s, and they’re doing it again now.”…. http://norightturn.blogspot.co.nz/2012/04/national-in-pictures.html

    Selling our assets is a right wing swindle. Badly done deregulation is a disaster ….

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  49. The NZ railways sale was a rip-off and a swindle. The serious fraud office got involved, multi-million dollar settlements were made. New Zealand and New Zealanders got shafted while a few rich people made out like bandits …..

    Respectable economists have stated that flogging off our assets makes no sense while dishonest National trolls like photonz1 tell us its a good idea.

    The Nats and their boy photnz1 are dishonest …….

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  50. You explained nothing photonz, the 18.5% figure came from an answer from a Minister to a question in the House – if it was not true the Minister was guilty of misleading the House. You provided no evidence to show the Minister mislead the House.

    Your claim, that any increase in value of property is irrelevant if the owner does not intend to sell, is simply wrong in principle. Banks are prepared to increase mortgages on property up to current market value even while the owner still lives in it. Similarly to those operating farms in family trust. Banks lend up to the value of the asset (the maximium limit) though a lower limit can be the ability to service the loan cost off income flow. The general practice is that both asset value and income flows determine the borrowers capacity to receive credit.

    As for lending to government, reputation (historic standing until this is lost) counts as much as comparison of relative debt levels or asset ownership statistics, but generally it is government debt per GDP and net government debt per GDP (where market value to asset ownership is a factor) impacts on both debt cost and the amount that can be borrowed before there is a loss of credit rating.

    So any loss to the government of the rising value of half the SOE assets sold off will have consequences.

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  51. under control of some of the most successful and experienced rail operators in the US and Australia.

    Who welded the rails rather than fixing them correctly? Because it was cheaper? THOSE operators?

    What part of the… 40 years of neglect and preferential treatment of roads here culminating in the sell-off, was thought through with any understanding of future needs?

    We’ve been through this before Photonz. You will bring up all manner of fantastic stories of how privatization is good for us. We know that it will put people out of work, lead to deterioration of essential infrastructure and cause money to wander overseas, never to return.

    There are enough negative examples of this process in the world and our rail system is an important one, for us to be able to learn from them.

    National either knows of these issues and ignores them because it is being paid well to ignore them… or ignores them out of ideologically willful ignorance.

    A more dedicated bunch of wreckers has not been seen in NZ in decades.

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  52. SPC says “You explained nothing photonz, the 18.5% figure came from an answer from a Minister to a question in the House ”

    So what did he ACTUALLY say?

    No one has ever provided that link.

    Russel provided many links to the “admission” but none actually have any admission at all – just Russels same accusation repeated yet again somewhere else.

    SPC – You have unable to explain how a book value of something that will never be sold, will ever earn even enough to pay for even a single child’s vaccination.

    So some things for you to prove.
    1/ What did the Minister really say.
    2/ How will a rising value of something that will never be sold, pay for even a single vaccination? Let alone return 18.5% to Kiwis.

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  53. BJ says “Who welded the rails rather than fixing them correctly? Because it was cheaper? THOSE operators?”

    Actually a welded joint is far superior than a bolted one.
    – less breakages
    – less joint wear
    – less risk of a derailment
    – less risk of buckling
    – less wear on trains
    – more stable track
    – less track wear

    When I worked for the railways we replaced tens of thousands of bolted joints (around 160 per km) that continually worked themselves lose.

    Even with protectionism making it illegal for a truck to travel more than 150km, the govt owned railways lost hundreds of millions each year.

    You may prefer the old days when –
    – it cost $10 minute to call overseas by phone,
    – you had to put your name on a waiting list just to buy a phone
    – it was illegal to deliver between cities by truck
    – so you had to pay a fortune to the railways
    – it took days longer for your goods to get there
    – goods often didn’t turn up where they were supposed to
    – or went missing altogether
    – the Railway owned Cook Strait ferries went on stike every school holidays.

    Under govt ownership, the railways was a total mess.

    The way it was run, the workers attitude, the financial situation, the time it took to haul freight, the number of people it took to do a job, the whole lot – everything about it – was the antithesis of efficiency.

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  54. Actually it was linked above – via his press release on 8 February.

    That press release linked to the Crown Monitoring Unit report and identified the answer as coming from the Minister on 8 February.

    The transcript

    4. Dr RUSSEL NORMAN (Co-Leader—Green) to the Minister for State Owned
    Enterprises: What, according to the Crown Ownership Monitoring Unit, was the average total shareholder return of Genesis, Meridian, Mighty River Power and Solid Energy over the last five years and how does that compare to the average cost of borrowing to the Government right now?

    Hon TONY RYALL (Minister for State Owned Enterprises): The Crown Ownership Monitoring Unit (COMU) estimates that the weighted average total shareholder return of the four energy companies over the last 5 years is 18.5 percent. This does include major non-cash items, one-off items, revaluations, and changes in accounting methodology. It includes, for example, the 521 percent revaluation of Solid Energy, which the Prime Minister spoke about earlier, and also the $600 million one-off sale of Southern Hydro. So that figure is unusable. A better summary is the weighted average dividend yield of the 2000-2011 years, which is 4.1 percent. COMU advises that the average cost of Crown borrowing over the last year is 4.5 percent.

    Dr Russel Norman: How is it fiscally rational for the Government to sell assets that earn 18.5 percent in order to avoid taking on debt that costs around 4 percent?

    Hon TONY RYALL: I think what the member needs to be clear on is that that is not a valid comparison. The 18.5 percent includes a whole lot of one-off items, significant changes in accounting policy in the way that these valuations are determined, and includes also a number of non-cash items. So these are strictly not comparable in the way that he is seeking to present it.

    Hon Clayton Cosgrove: Why did the Government’s Pre-election Economic and Fiscal Update book the revenue from the asset sales while not taking into account the forgone dividends?

    Hon TONY RYALL: My advice to the member would be that I think the best response to that would be when the Budget Policy Statement is released. I think the Prime Minister said that would be on 16 February.

    Dr Russel Norman: Is he saying that he disagrees with COMU when it stated that it is moving to the use of total shareholder value as the key measure of company and portfolio performance? Is the Government accepting that assessment or is it rejecting it?

    Hon TONY RYALL: Well the Government accepts it in the sense that it is moving towards total shareholder funds, but the number of these years, over 5 years, do not use methodology that are exactly comparable. It is inconceivable that the value of Solid Energy could go from sort of $475 million one year to nearly $3 billion the next, and not be attributed to accounting changes. So over time the measurement of total shareholders’ funds will become a more comparable figure, but currently the changes in methodology, the frequent non-cash items, and the number of one-off items mean that that figure is not comparable in the way that the member seeks to use it.

    http://parliamenttoday.co.nz/2012/02/questions-and-answers-feb-8/

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  55. A question to ponder, is a weighted average dividend yield of 4.1% “on assets rising in value year by year”, less or greater than a debt cost of 4.5%?

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  56. Actually a welded joint is far superior than a bolted one.

    Are you insane?

    If the rail wasn’t designed for it, it buckles Photonz… I spent 14 hours on the train from Auckland to Wellington on account of this little issue when I arrived here.

    If it is DONE RIGHT it is fine.

    … and it was DONE CHEAP.

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=3007840

    …because it wasn’t done right, it was done CHEAP.

    You can apologize for the idiots in charge of this stuff all you like and we will still know them for the thieves and liars they are. Not that Labour is a lot better, they are actually worse liars (which is how National got elected) :-)

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  57. BJ,

    Welded rails have been in use around the world (including the USA) for over 50 years.

    I joined the old Railways department as an engineering cadet 40+ years ago and welded rail joints was standard even then.

    One of my first jobs was to maintain and create welded rail diagrams.

    From a rail joint there would be one welded joint then a bolted one then two welded joints than another bolted one, culminating in lengths of up to 6 sections of welded joints.

    These step ups and downs in welded joints to bolted ones were standard procedure and even now when I travel the rails I can tell by the sounds made when we come up to a turnout or bridge.

    Each turnout, bridge, etc has a bolted join at each end so step ups and downs of bolted to welded joints were diagramatically done by the engineering staff and carried out by the gangers.

    Welded rail allows for expansion of the rail through sideways expansion as the longitudinal one is curtailed. This relies on stout sleeper and sleeper plate fastenings, hence the move away from Australian hardwood (jarah) sleepers used in between 1940 to 1960 and the NZL softwood (pine) sleepers used between 1960 and 1980 to concrete ones.

    Bolted joins also improved from the old four bolt to the bigger six bolt model.

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  58. I am glad so many people with experience on railroads are around to advise me that a CORRECTLY welded continuous rail won’t buckle. Unfortunately, there are two problems with using that fact to tell me that I am wrong.

    The first is that the goddammed rail buckled.

    The second is that I wasn’t talking about a correctly prestressed and welded connection… I was talking about what was done in New Zealand… which appears to have been rooted in some Australian’s attitude that this is a temperate climate.

    This was and is a perfect example of the result of privatization as a religion. A monopoly. Substantial infrastructure. A large investment requirement to maintain and increase capacity with low SHORT term returns.

    A perfect counterexample to what is best privatized.

    ciao
    BJ

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  59. The fact is, in NZ welding was not done properly to cut costs. Trains are still having to run slow in hot weather due to insufficient expansion joints. The owners were only interested in short term profit and making the business look better for on-sale.

    The NZ rail buyers were allowed to make millions at the expense of NZ.

    Lets not forget that when oil costs inevitably go up rail will be competitive with trucking. If we can even pay the foreign exchange cost of oil.
    Whatever costs we are paying now to maintain a rail network are miniscule compared with the costs of re-establishing it when we need it.

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  60. BJ says “I spent 14 hours on the train from Auckland to Wellington on account of this little issue when I arrived here.

    If it is DONE RIGHT it is fine.

    … and it was DONE CHEAP.”

    The welded rail programme for the North Island Main Trunk Line was done BEFORE the railways were privatised.

    It was done in conjuction with the concrete sleeper programme and the NIMT electrification – I know – I worked on the middle section from Taihape to Taumarunui as an engineering officer.

    And besides that, buckling rails has nothing to do with “cheap” welds. It’s all to do with the sleepers at Gerrit points out.

    So that’s a bit of an own goal for you BJ. And for Kerry.

    You blame the buckling on a private company doing cheap welds. And then you blame Australians.

    The private company didn’t do them.

    And the buckling is not because of cheap welds.

    Australians had nothing to do with them.

    It just shows you’re quite happy to make up totally false accusations if they fit your blinkered preconceived ideology.

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  61. BJ and Kerry,

    Any links, examples or techincal reports that the welding was done at cost cutting levels or are you both just painting a picture to suit your perceptions?

    Rail buckling was a problem prior to privatisation, especially on the lighter grade 71 lbs rails used on non main trunk lines (especially on the NAL).

    Rails buckling on the 91 lb or the heavier 110 lb rails is a lot less. Thicker webs and higher profiles allow for better side expansion while maintianing correct profiles.

    Prestressed welds BJ?

    Welding procedure should correctly be called metal fusion. Cant prestress 91 lb rail before the fusion process as the rails joints are about 12mm apart before starting and are pulled together during the fusion process. No welding materials are used in the workshops.

    Onsite fusion uses thermite to generate the heat to fuse the rails together.

    More info here

    http://www.nt.gov.au/aarc/info/factsheets/rail_welding.htm

    A small amount of the stress developed along the rail can be taken up with expansion across the rail. Its height and width expand due to their own dimension as well as some distributed stress from the longer length. The rail bulges slightly. As long as the column is prevented from moving sideways along its length it is very stable.

    Just as well there are a few knowledgeable rail people about.

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  62. Rail lines are best joined using thermite, so the rail sections aren’t joined; they become one. So no clank-clank as the train goes along.

    No idea how they handle expansion.

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  63. SPC asks “A question to ponder, is a weighted average dividend yield of 4.1% “on assets rising in value year by year”, less or greater than a debt cost of 4.5%?”

    Points
    1/ There is zero guarantee on the dividend yeild.
    2/ There is a 100% guarantee on the reduction in interest.
    3/ The reduction in interest is almost certain to become greater in the future when interest rates go back up from current record lows to a historic aqverage.
    4/ Companies can go bust. The rise “year on year” is not even close to being guaranteed. Contact and Telecom are worth no more today than when they were sold 10 and 20 years ago.
    5/ The reduction in interest is forever.
    6/ Any rise in asset value is worthless until sale.
    7/ If the assets are never sold, then any rise in value can never be realised – it is of no benefit.

    On a personal level (not the govt situation were were discussing)
    a/ A 4.1% return is equal to $2.9% after tax
    b/ To equal a 4.5% interest payment, you’d need a 6.25% return before tax.

    So for an individual who pays tax, paying off interest at 4.5% gives OVER DOUBLE the return of getting an income return (dividend or interest) of 4.1%.

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  64. For the rail not to buckle (usually a compression failure in hot weather) it has to be prestressed in tension when it is “welded”, no matter what the process is to weld it. There really aren’t many other choices except for making the rails out of Invar and I don’t think we can afford that.

    BJ

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  65. bj says “For the rail not to buckle (usually a compression failure in hot weather) it has to be prestressed in tension when it is “welded”, no matter what the process is to weld it.”

    No. If you tried to prestressing the rails all you’d do is pull all the curves out of alignment.

    Remember that when rail is installed, it has to handle both temperatures that are much hotter, AND much colder.

    Welded rail relies on heavy concrete sleepers to stop the rail moving when there are unusually hot or cold temperatures.

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  66. Photonz could you link to the Treasury records you said showed that Contact was sold for 2.3B in 1999? I found another source that said it was only $1.2B.

    You also keep foregetting the government is not paying down debt with the proceeds of the assets sales. But puting the money into building new roads etc.

    If power generation assets were conservatively forecast to increase only by the rate of inflation and were generating a 4.1% weighted average dividend return, that would be more than the 4.5% debt cost would it not?

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  67. Uh… no Photonz… it actually requires both techniques.

    http://en.wikipedia.org/wiki/Rail_stressing

    There is no way to do this with just the concrete unless you have a very nice and even tempered climate. The rail-neutral stress has to be high enough that the compression induces stress rather than actual deformation in the rail. This may in fact be part of what got them in trouble. NZ is a nice temperate place. Right?

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  68. I think I have sorted it out – it was a trade sale to Edison plus a share float and the total was 2.3B as you said.

    http://www.treasury.govt.nz/government/assets/saleshistory

    Even so, if Contact the conservative model was used, then power generation companies would be forecast to increase in value by more than inflation – and so a weighted average dividend return of 4.1% over the next 10 years would generate more than the 4.5% pa debt cost.

    For example the Contact sale price of $2.3B at 4.5% is $103.5M
    Whereas todays Contact value of $3.3B at 4.1% is $135M.

    And the recent estimates of the value of the SOE power generators is that they have increased in value by more than inflation (an 18.5% total shareholder return over 5 years) and yet still delivered the weighted average 4.1% dividend return.

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  69. So given we are going to be worse off for having sold the assets, why?

    NZ Asset Sales Policy Began On Wall Street
    By Lewis Verduyn

    The Key government’s asset sales agenda is derived from the Washington Consensus – a set of Wall Street-driven policies that were pronounced dead after the global financial meltdown in 2008.[1] The New Zealand government, however, remains loyal to this failed ideology.

    Why? The obvious link is Prime Minister John Key –a former investment banker for Merrill Lynch, the world’s largest brokerage failure.

    In most other countries, state asset sales have become a last resort on the road to poverty and ruin, but for the Key government, asset sales are “business as usual.” [2]

    So what’s really behind asset sales?
    All wealth extraction is facilitated by international and national economic policies, coupled with the private banking system, which together deliver benefits to the financial elite by transferring wealth upward within and between nations.

    http://www.scoop.co.nz/stories/PO1201/S00050/nz-asset-sales-policy-began-on-wall-street.htm

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  70. BJ says “no Photonz… it actually requires both techniques.”

    My error. When I worked for the railways there was no stressing for the welded rail programme. Our welded rail programme was six lengths welded together for every bolted joint, rather than the continuous welded rail as per your link (no bolted joints at all).

    Anyway, the point is that the North Island Main Trunk Line you complain about, was welded when it was govt owned.

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  71. SPC – sorry I was out so didn’t answer your questions about Contacts sale price, but it looks like you’ve found it.

    If you put $2.3b from 1999 into the inflation calculator, you’s see it comes out almost exactly at what Contact Energy is valued at today.

    So the increase in asset value of Contact in real terms over 13 years is virtually zero.

    SPC asks “If power generation assets were conservatively forecast to increase only by the rate of inflation and were generating a 4.1% weighted average dividend return, that would be more than the 4.5% debt cost would it not?”

    Two answers.

    No. If you never plan to sell them, then rise in asset value is completely irrelevant. No one can ever benefit from it. The book value could go up massively, or drop massively, and it’s not going to make the slightest difference to a single Kiwi.

    Yes. But only if you sell the assets. Which is the only way you can ever realise a single dollar of benefit from the rising value.

    Here’s a question back. Companies capital value goes up because they they make more money. Why would the value of the generating companies skyrocket, year after year, when
    1/ they make a very low profit, and
    2/ they profit has been static for years.

    Contact, Trustpower etc, are in the same business, have relatively similar dividend returns to the SOEs, so why doesn’t their price skyrocket, year after year after year, as claimed is happening to the SOEs?

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  72. The privatization of our railways was a massive rip-off which involved asset stripping, insider trading and degradation of our railway networks.

    The rip-offs were so bad the serious fraud office got involved and settlements worth tens of millions of dollars were paid to stop legal action.

    A few very rich people managed to make themselves richer and the rest of us had to pay to put things right.

    The fact photonz1 uses the railways as an example of successful privatization would tend to suggest he supports rich people defrauding the rest of us ………… which is a bit like the national party when you think about it .

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  73. Well shucks… you may have a point. When the railroad people I spoke to at the time explained it as being a problem with the welded rail buckling in the heat I DID sort of assume that this was caused by something recent. After all, its the national rail link between two major cities.

    Never occurred to me that something like that wouldn’t be fixed in a decade or more.

    I know welded rail has been around long enough to know how to do right.

    I know the sort of forces exerted by expanding steel when temperatures change.

    So I assumed that it was done recently and wrong. Well I was wrong, it didn’t have to be. ( Do you have a source to tell us when the rail WAS welded? I could find nothing but a photo of a specific bit of it being done in 1930’s )

    All that was really required was for the maintenance of it to be cut back to where the rail and railbed was deteriorating faster than it was being fixed. A decade of that would bring the system to the same sort of parlous state it was in when I arrived.

    The point that privatization failed to serve New Zealand and her people well in that case, remains sharp.

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  74. nznative wrongly claims “The fact photonz1 uses the railways as an example of successful privatization ”

    Nonsense – I’ve never held the railways up as an “example of successful privatization”.

    Tranzrail were losing money running the railways.
    Toll were losing money running the railways.
    The Govt were losing money running the railways.

    New Zealand would be just about the hardest and least efficient country on the planet to run a financially viable railway, regardless of who is running it.

    Even when the govt made it illegal for trucks to travel more than 150km they couldn’t stop it from losing money.

    BJ asks “Do you have a source to tell us when the rail WAS welded? ”

    There was a lot of it going on in the 1980s, particularly in conjunction with the electrification of the NI main trunk line and concrete sleeper programmes.

    BJ says “A decade of that would bring the system to the same sort of parlous state it was in when I arrived.”

    It used to be a lot worse. Derailments were regular.

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  75. I looked for derailment stats and relating them to cause… not going to be easy to do. This would probably take some serious research time in the National archives. I haven’t the time.

    The Railroad wasn’t done… well. I know all the publicity about the engineering marvel that it is, but I don’t buy into the hype. It is incomplete on several counts.

    Most importantly it is not electrified the whole way between Wellington and Auckland despite some fairly impressive runs of electrification out in the boonies. Seriously. Electrified from Palmerston North to Hamilton. The hardest work was done ages ago.

    But not between Auckland and Hamilton? Which is not only flat but high volume? Or would be with a dogleg past the airport. Of course Auckland was never electrified either… and the electrical system between Palmerston North and Hamilton is not the same as the Wellington-Waikanae electrification. Pffffft!

    Now that we’ve finally got electrification in Auckland, extending it to Hamilton would seem to first step in finally knitting things together… or is this now a third voltage specification???

    I don’t know. I have to believe that it will be.

    :-(

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  76. BJ says ” and the electrical system between Palmerston North and Hamilton is not the same as the Wellington-Waikanae electrification”

    That’s probably because in the half century between the two electrification projects, the best technology changed.

    I can’t remember why the Hamilton- Auckland bit wasn’t electrified. Electric has a much bigger advantage of deisel/electric on the steeper parts of the line (so not so much on that relatively flat section).

    The cost/benefit of the electrification project was nowhere near what was predicted (it cost 250% more than budgeted, fuel prices went down, and so did freight volumes). So perhaps the Auckland – Hamilton part just didn’t make economic sense, particularly in a time when then railways was losing hundreds of millions per year.

    Mind you it’s always extremely hard for NZ railways to make economic sense – there would be few countries anywhere in the world who have so many disadvantages for running a railway.

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