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Does sale of Meridian Energy comply with fiscal principles

29 October 2013


Does the partial sale of Meridian Energy comply with the government’s fiscal principles, as laid down in the Public Finance Act?

Now that the number of investors in Meridian Energy has been revealed at a disappointing 62,000 and the share price at launch has been set at the lowest end of the proposed value it is worth considering whether the government has been following its own rules in selling down the power company.

The government recently amended the Public Finance Act (PFA).  This is the law that ensures probity and the management of fiscal risks and requires the Treasury to carry out regular reporting on how government policy matches the principles in the Act,.  The principles include the following:
•          debt reduction and management of debt
•          ensuring that the government’s net worth provides a buffer for the future
•          prudently managing fiscal risks
•          ensuring efficiency and fairness in fiscal policy
•          considering the impact on present and future generations; and
•          ensuring that the Crown’s resources are managed effectively and efficiently 

The fiscal risks reporting framework explicitly includes asset sales and Treasury has twice advised about the risks of this course of action.  On 21 December last year Treasury was reported as advising against selling all three power companies in subsequent ‘sale windows’ because of the reduction of value likely to be returned by rapid sales. Their advice was that this would devalue the companies. The May 2013 budget forecasts report included a “changed” (i.e. worsening) fiscal risk from the proposed asset sales as follows:

the final amount and timing of any cash proceeds, forgone profits, the flow-on effects for the Crown and any implementation costs are uncertain, and may differ from what has been assumed in the fiscal forecasts”

There is therefore a strong argument to show that by persisting with the sale the government is not complying with its own recently revised legislation providing for prudent fiscal management.  This argument is based on the following reasons:

•          The new legislation’s principles – not to cut off future options, to provide a buffer for resilience, and in favour of intergenerational equity – are all in direct conflict with selling down publicly owned assets. Meridian Energy has been the government’s single biggest earning asset and share ownership will put its future infra-structure and development decisions outside of government control, adding risk to these areas.  How is this prudently managing financial risks?

•          Whether the true reason for the sales is portrayed as debt reduction or the ring-fenced “future investment fund” (as the investment in schools is being described) the case for asset sales was always dubious against any measure of fiscal responsibility. The costs to the government of debt servicing and of borrowing are at rates significantly less than cost of Meridian’s yields – how can that be construed as a fiscally responsible strategy?

•          Meridian Energy’s yields of 8% and more would have returned to government within a dozen years the amount gained by selling half of the company, and this return will be denied to future New Zealanders.  How does this ensure that the government’s net worth provides a buffer for the future?

•          The costs of sale, short-term subsidies for partial payment of shares, the reduction in cost to personal investors and the benefits to overseas based purchasers will see the NZ taxpayer effectively subsidise investors.  Partial privatisation cuts off other opportunities such as ending fuel poverty.  How does this make effective use of the Crown's resources or ensure efficiency and fairness in fiscal policy?

•          Finally there is no legal reason why the mixed ownership companies could not sell off generating capacity thus alienating in part even the publicly owned 51% of the assets.  This may seem far-fetched, and it is deemed by Treasury to be unlikely, but only last year the likelihood of Solid Energy becoming a worthless company would have seemed unthinkable.  How does this potential alienation of our rights as taxpayer owners of the 51% (reasonably) take into account the impact on present and future generations?

•          Media reports report  the Treasury has advised against the sale (and here), saying that they may not raise the expected revenue.
•          The 2013 budget forecast advice on specific fiscal risks from Treasury addresses the issue that the risk of selling its shareholding in State Owned Enterprises has changed for the worse.
•          Rod Oram describes how US legislation has determined the way the Mighty River and Meridian investments have been handled.
•          Treasury report overview of commercial issues related to the sale including the sale of generating capacity by partly privatised entities.
•          Public Finance Act


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