Last week we released our minority select committee report on the National Government’s Asset Sales legislation. They treated public opinion on this issue with utter contempt and abused the select committee process. National has an irrational ideological obsession with asset sales. It is the one overriding priority of this government.
You can read the full report here.
New Zealand Labour Party minority view
Labour agrees with the vast majority of submitters that this legislation is unnecessary and misguided, and will increase power prices, increase asset inequality, increase the government deficit, increase the current account deficit, and leave New Zealand worse off.
These assets were built by generations of New Zealanders and survived during times that were tougher than today. The Government has no mandate to sell them now by the narrowest of parliamentary margins. As one submitter stated, “We are robbing the future by selling off something paid for in the past”.
The unnecessarily rushed methods adopted by the committee in considering this legislation were forced upon submitters and opposition members by the National Party majority on the committee.
At the meeting of the Finance and Expenditure Committee on 30 May 2012, six weeks before the 16 July reporting date, after just one hour of consideration following the hearing of submissions, the Chair of the committee advised that it was his intention to complete consideration and move to deliberation on the bill on 7 June, five weeks ahead of the reporting date allowed by Parliament.
This minority view was required to be submitted prior to the 7 June meeting. The opposition motion that minority views not be required before consideration was completed was opposed and defeated by Government members.
This process has meant that opposition parties have not had the normal opportunity to put the bill or our minority views to our caucuses prior to deliberation. Consideration has been so rushed that we have not even been able to seek proper advice confirming or disproving the evidence given by submitters about average residential electricity prices being $265 per annum cheaper via the publicly-owned SOEs than are charged by privately-owned competitors, nor the evidence from submitters that the share sales will result in the partially privatised SOEs increasing their prices to those charged by the private sector participants. When opposition members complained that their rights and proper committee processes were being over-ridden, the Hon Nick Smith said we were wrong and asserted a similar process was used by the Labour majority to push through the emissions trading legislation in 2008. In fact the Finance and Expenditure Committee report on that bill shows that the committee heard 58 hours of submissions and took almost 16 hours for consideration.
The treatment of submitters also left much to be desired. Treasury officials wrote the departmental report before all submissions were heard. On many occasions, questions from the committee had to be truncated because of time constraints. Some submitters were treated disrespectfully by National members of the committee, with one asked who he had voted for in the 2011 election. The accessibility of the process was constrained for submitters. Only five minutes were given for some submitters. There was only one half-day of hearings in the South Island, with no hearings in Dunedin. There was very short notice for teleconferences. Overall it seems obvious to Labour members that the processes adopted by the Government members have been used to minimise the length of the process in order to limit adverse publicity, rather than enable the committee to go about its business in a thorough and properly considered way. As one submitter put it, “The Government has cotton wool in its ears”.
Submitters by an overwhelming majority did not accept the economic rationale for the planned asset sales. Privatisation makes the Government’s deficit worse. Treasury estimated in the pre-budget fiscal update that the Government saves $266 million in borrowing costs yet it loses $360 million a year in profits. That’s a $100 million a year loss to the Crown from selling our assets.
The fact that selling the SOE shares makes the deficit worse was hidden from voters during the election, because Treasury allowed the Government to book the proceeds of asset sales in the pre-election fiscal update without disclosing the loss of profits on the interests sold. This was scandalous, and allowed National to avoid this truth. External private debt is a bigger issue for the New Zealand economy than public debt, and this will worsen the problem. In the long term this will have a negative effect on New Zealand’s balance of payments as more profits go overseas. Contact Energy, raised by many submitters, is a ready example of how ownership and dividends will head offshore.
Even if “only” 15 percent of the shares are owned by foreigners, that’s $100 million a year in profits going offshore, worsening our current account deficit, and another $2 billion on our country’s net international liabilities. To sell off these assets, the Government is also forking out over $120 million in fees to merchant bankers. National doesn’t have an accurate idea of what they’re going to get for these assets. Last year the Prime Minister said the sales would free up as much as $10 billion, then it became $7 billion, now it’s $6 billion. Bill English has said the amount is a “guess”. It seems the Government is determined to proceed at any price. Selling at a time of subdued economic activity and flat capital markets is likely to reduce the price obtained. Selling off four energy companies over three years may also flood the market and lead to lower prices for the assets than if the sales were staggered over a longer period of time.
The Crown borrows at around 4 percent per annum. These assets are a profitable investment for the Crown, which returns hundreds of millions in dividends, which pay for schools and hospitals. Private investors have a higher cost of capital. The CEO of Contact Energy recently told commercial investors that they shouldn’t invest in energy projects until prices rise because a 6 percent return is not enough to cover their desired 8 percent cost of capital.
Only one of the oral submitters was willing to speak in favour of the legislation as currently proposed. Under questioning they conceded that other options such as the issue of bonds may be a better alternative to asset sales for paying down debt or funding capital spending although they noted that this was not the proposal they were invited to comment on.
Even if selling down holdings in these companies was desirable, a blanket sale of 49 percent is not an optimal figure in any economic sense; it is a political number backed by no analysis of the effect on future efficiency or profitability of the affected companies.
The power network is, like the water system, of strategic importance to New Zealand’s economy. Many submitters noted that energy and water will be amongst the most critical inputs to our economy in the 21st Century.
The sale of strategic assets is incompatible with the “NZ Inc.” approach; it ignores the importance of energy to growing the economy. Public ownership ameliorates problems with the uncompetitive market in the electricity sector. Excessive profits through excessive prices found by the Wolak Review were returned to the public via Crown ownership. The prime focus of the so-called market is profit, not security of supply. In the absence of true competition, with profit maximisation as the almost singular aim of private shareholders, there is limited incentive for power companies to improve energy security. Brownouts and the gaming of electricity spot prices, while sometimes profitable
for energy companies, can have significant negative effects on productivity and economic growth.
Past privatisations (such as New Zealand Rail) have resulted in asset stripping and the running-down of utilities at the cost of economic development. Similarly Air New Zealand had to be bought back by the last Government after it failed, for reasons of the national interest.
Security of supply issues have been predominantly addressed by SOE generators, who have invested more in new generation than their competitors. Since Contact Energy was privatised, its proportion of generation has dropped while its profitability and retail income have increased.
The weighted average charge for domestic electricity users buying from SOEs is $265 per annum less than the average for non-SOE suppliers. It is likely that once privatised the former SOEs will pursue price-maximising strategies which will see their prices rise. This will increase power prices, especially to residential consumers. The idea that the sell-off is necessary to create investment opportunities for New Zealand investors is a weak one. The Labour Party does not accept that New Zealand capital markets are so inept that they can only succeed through trading what the Government has created.
With the right savings, tax, and investment policies in place New Zealand private enterprise will prosper. The sale of the SOEs is no substitute for those policies. New Zealand’s renewable electricity assets are a point of economic advantage for New Zealand, created by generations of New Zealanders through their Government. They ought to stay in New Zealand control for the benefit of all New Zealanders, and be held on their behalf by the Government.
One submitter cited the example of Norway which retained control of its oil resources, ensuring Norway’s social and economic security in the following decades. New Zealand is a world leader in renewable energy, yet this Government plans to do the opposite of Norway and sell off an industry sector that will provide the backbone of a carbon constrained21st-Century economy.
Public ownership keeps prices down. In 84 percent of lines company areas, the most expensive electricity retailer is privately owned. Nationwide, private power prices are an average of 12 percent higher than SOE prices. Weakening public ownership will remove a major restraint on power prices.
Several submitters stated that this legislation will cause power price rises, particularly for low-income residential users. Data from the MED presented by Molly Melhuish on behalf of Grey Power shows that an average customer consuming 8,000 kWh per year will pay
$265 more per annum to an “average” private electricity company than to an “average” SOE.
Not one electricity generator or retailer submitted on the bill, which was surprising. Some submitters noted this and said it was because there is no answer to the evidence that these sales will lead to increases in electricity prices.
Many submitters were concerned at the impact asset sales would have on “fuel poverty”. One submitter stated that 60 percent of NZ housing stock is below WHO standards and 25 percent of New Zealanders currently live in fuel poverty. The price rises that privatisation would instigate will make this problem worse. As one submitter from Grey
Power noted, “There is no doubt in our minds people will die from the cold because of this bill”.
The 2008 Wolak Report was commissioned by the Commerce Commission during the term of the last Labour Government. The report was delivered after National was elected. It found up to $4.2 billion of overcharging in the electricity industry in the 2000s suggesting there are underlying problems with the market. Upon taking office, National largely ignored the report and prices have increased further since, albeit at a slower rate than in the prior decade.
Bill English has admitted that CEO salaries are already going up because of National’s privatisation agenda. Kiwis pay for these extra costs through higher power prices. Currently, SOEs are legally required to consider the impacts of their actions on New Zealand communities. That means when they think about putting up power prices they have to consider if it will be affordable for their customers, and if it will damage economic growth.
National is not replicating that social responsibility clause in this legislation. Many submitters also noted that the removal of the social responsibility clause could encourage price gouging. The submission from the Service and Food Workers Union noted the importance of the social responsibility clause, stating that their members (who are relatively low-paid) spend up to a fifth of their income on energy. A Dunedin City Councillor submitted on the problems the council had ensuring continued provision of public services after the privatisation of public assets.
The submission from Caritas noted that state ownership is a better way to ensure the provision of essential services, particularly for the most poor and vulnerable consumers. A number of submitters also noted the disparity in the increase of residential and industrial prices since commercialisation of the industry in the 1990s, suggesting that
this gap is likely to widen further under privatisation.
National says that “up to” 30 percent of the shares they want to sell will go to foreigners. But there is nothing in this legislation to ensure it won’t be more. Over time it is likely initial purchasers of shares will sell to overseas interests.
John Key made a personal commitment during the campaign that there would be a cap on foreign ownership. This legislation does nothing to deliver on that commitment. In the recent sale of QR National in Queensland, at least 35 percent of the shares went offshore.
Although Tony Ryall has raised the possibility of a “loyalty bonus” for domestic investors, (like that used for the sale of QR National) this was not discussed in the committee. Nothing is present in this legislation to ensure that “Kiwis are first in the queue” as the Prime Minister promised during the election campaign.
Many submitters noted that in the sale of public companies to private investors, rather than 49 percent, around 20–25 percent of active shareholding is the “tipping point” at which shareholders have sway over the direction of the company. At 49 percent private ownership, the pressure to maximise profits through price maximisation will prevail. Many submitters also believe the sales will not stop at 49 percent, and that there will be pressure for the proportion of private ownership to increase in the future.
As noted by several submitters the restrictions around the “10 percent” cap on shareholdings is light-handed and no provision has been made for actively policing this loophole. Individual energy assets, like the Manapouri power station for example, could be sold off into full foreign ownership and control by the companies being partially privatised under this legislation.
The submission of the Office of the Ombudsmen stated that no sufficient grounds have been advanced for removing the companies from the reach of the Official Information Act (OIA) while the companies remain in majority Crown ownership. No information of commercial sensitivity would be at risk of disclosure because the Act already allows non-disclosure in those situations. The loss of OIA applicability could also reduce accountability and increase the risk of cronyism and corruption in these companies. Some submitters raised concerns about “state capture” suggesting the Government departments involved in the sale process including Treasury were “captured” by the financial services industry and were unable to provide objective, independent advice on the sale of assets.
Many submitters also noted their concern that investment rules in free trade agreements will constrain future governments from altering energy policy.
The vast majority of New Zealanders oppose asset sales. They know it doesn’t make sense to flog off these strategically vital and highly profitable assets.
National does not have a mandate; in 2011 40,000 more people voted for parties that oppose asset sales than support them. It is only the deals National cut with ACT and United Future that are allowing these sales to proceed.
Of the 1,448 submissions listed in the departmental report, 9 were in favour, 1,421 were opposed, which equates to 0.6 percent in favour and 98.1 percent against. The fact that the asset sales increased the deficit was hidden from view during the election because of the mishandling of the issue in the pre-election fiscal update, as discussed above. Deals with merchant banks to sell off the assets were signed and agreed upon by the Government well before approval of this legislation by Parliament. Furthermore, a website advertising share sales has been “live” for weeks in advance of the legislation being approved by Parliament.
World leaders of the 21st Century such as China, Google Inc. and Apple Inc. all have long-term vision and are actively investing inrenewable energy. The National-led Government is selling a major part of the public’s current interest in renewables.
These assets give New Zealand a strategic advantage in renewables, especially with the cost of carbon predicted to rise rapidly over the coming decades. Privatised and solely focussed on profit, it is possible that power companies will be more open to carbon-intensive energy sources that are counter-productive in the fight against climate change.
Treaty of Waitangi
The Treaty protection provided in the legislation is inadequate; it only applies to the Crown and allows assets of the SOEs to be sold without recourse to Parliament. The Treaty obligations of the Crown are not even being applied to directors appointed by the Crown.
The submission of Ngāti Tūwharetoa was backed by former National MP Georgina te Heuheu, who campaigned for National in the 2011 election. The iwi is concerned the sell-off will infringe property rights it asserts to water and land underlying waterways. It is also concerned consultation has been inadequate.
Ngāti Tūwharetoa emphasised the importance of resolving this issue before the sales proceed. The submission was not taken seriously by the National members and an outdated report was used to rebuff their submission.
In the view of Tūwharetoa public ownership of the power companies provides strength and security and public benefits for New Zealand through collective ownership. This is akin to the Māori principle of kaitiakitanga which is intergenerational and encourages a custodial/guardianship view of business and assets, favouring long-term stability over short-term gain. Tūwharetoa believe that private control of the water resource and structures, and privatisation of the economic benefits which are earned from their use, is in breach of the understandings they had with the Crown when the power stations
Ngati Tūwharetoa stated this issue risks upsetting Crown–Māori relationships and will trigger arguments over the ownership of water.
There is no evidence that the sale of state assets will improve the economic, social, and fiscal position of New Zealand. Rather, this legislation will increase power prices, increase asset inequality and make New Zealand poorer and more indebted to the world in the long term.
This legislation is unnecessary and deeply misguided. The numerous faults in this legislation identified by submitters are compounded by a process of inadequate consideration and pre-emptory deliberation. By failing to properly consider submissions on this bill, the Government has abused the normal processes of the select committee and bequeathed a series of problems for future Governments to rectify