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“Should I invest in that power company?”

  • July 24th, 2012

  That was from a taxi driver  who recognised me from talking on TV about the NZ Maori Council claim to water.

"Do you want me to break the stupid law on financial advice" I asked. "Yes, if you know something if I'd like to know" was his natural answer.

I told him I intended to put in my $2000, because in most investment, entry price is the key and the Crown will price it at a level it expects to provide new investors with a good experience but without offering windfall gains.

After a bit of driving in silence he asked "How could it lose? Everyone says they're selling the silver". 

So I gave him a bit of history conveniently not mentioned by the deceptive politicians peddling the anti-sale line. Business is risk. State assets are sometimes dogs. Sometimes the Crown has been lucky to get out at the right time.

Ordure was heaped on Bill Birch for selling the central North Island forests for nearly $2.2bn. Critics vilified him because forestry was such a sure bet.

3 years later the Chinese governmentt, Fletcher Challenge and Brierley did not think so. When their JV wound up, those canny  investors (insiders in the timber industry remember) had lost more than 2/3rds of their capital, plus interest over the period. In real terms they may have retrieved less than ¼ of what they invested..

 Bill Birch had delivered a huge windfall to the NZ taxpayer.

 The future of generating could be similarly uncertain. It takes only one major power station investment at the wrong time (too far ahead of demand) to depress wholesale power prices for years. And solar and gas technology is changing fast. The US market is being transformed in ways no one was publicly expecting even 5 years ago, as fracked gas makes LPG terminals redundant. In the US even the cheapest generation, from coal, is getting close to being undermined by gas prices.

 The US could be almost energy self-sufficient in the near future, if it wants to be.

No asset is a sure bet. People who invested speculatively in oil companies banking on Peak Oil must be very disappointed new that oil shares look so floppy, quite apart from disaster losses, like those that have hit BP

The taxi driver persisted (they have lots of time listening to idiots on the radio) "Will the government could have to rescue power companies, the way it has had to rescue others? Why sell if you'll have to save them again?"

Unlikely I said, but even if they did, it would probably still be cheaper than funding the whole of some of the big commercial disasters. Better to share the loss with investors.

When Dr Cullen "rescued" Air New Zealand it was not the airline he saved. After receivership it would likely have operated under new ownership, probably the government's if it wished to pick it up. Instead he rescued the owners who would otherwise have got nothing after their mismanagement. Toll Holdings gained a similar benefit from a political desire to look like a saviour.

 I was on the establishment board of Coal Corp when we took over from the government. We found truly unbelievable waste. I seem to recall $40m worth (in 1986 money) of unusable Polish pit props.

In rail, the airline, and BNZ  the taxpayer probably got off  more lightly because of the preceding privatisation than if the businesses had not been sold then reacquired.

 Investors’ money in those businesses went west before the Crown recapitalisations. I  bet that the companies would have done pretty much what they did and lost even more if they had remained under Crown ownership.

The acquisition of a network in Aus was always Air NZ’s ambition. Buying Ansett was what brought Air New Zealand down. Ansett's owners would likely have extracted more from the fumbling fingers of a wholly government owned Air NZ than they did from Brierley as owners.

 Similarly, having been professionally involved after some banking disasters I doubt that government ownership of banks is any safer than private ownership. What Ruth Richardson had to inject into BNZ in 1991 could have been much greater if BNZ management had been as profligate as DFC management (wholly government owned) or State Bank of South Australia, or the German Landebanken which are currently folding.

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