Mighty River Power sale – hopefully the start of many

With the  unprecedented demand for Mighty River Power shares and its obvious success, any indications in the Budget that the Government may look to accelerate its sales  programme should be warmly received by all New Zealanders.

Why? Because these sales will make New Zealand a better place to live for all of us.

It’s not about selling the family jewels. The Government has over $150b invested in SOE’s, Crown Funds and crown entities (well over $100b of commercial equity and another $50b of crown entities). A mere 2% of that value is at stake with the sale of Mighty River Power, which equates to only $3b of equity.

It’s about making sensible decisions that will return this country to being financially independent and not relying on the banks of the world to keep us going.

Don’t think we are immune from the problems of Europe – we’re not. And unless we turn the ship around in the near future, the rocks of disaster are looming.

Just remember, the Government deficit was $9.2b for the financial year end 30 June 2012 or 11% of gross revenue. This is expected to reduce to $7.3b (8.7%) by 2013, and to $2.0b (2.2%) by 2014. By comparison, Greece was at 8.1% for the 2012 year and the European Union target is for countries to have a deficit to GDP of no more than 3%. 

We are a country in debt. The total projected government borrowings for years ended 30 June 2013 is $103b, and this is expected to rise to $118b by June 2016. This debt represents a debt per New Zealand household of $61k for June 2013, and $69k by June 2016.

When you consider that the average household income in New Zealand at 30 June 2012 was only $79,000, our debt to average income is presently 77% of average household income rising to 87% in the June 2015 year. The Government is forecasting to borrow an extra $4b net in the June 2013 year, $12b in June 2014 year and reducing significantly to nil in June 2015 but bouncing back to $6b in the June 2016 year.

As the late Margaret Thatcher famously said: “Even a British housewife knows that you can’t keep spending more that you earn.”

There are three ways to pay down debt - cut costs, earn more or sell assets that are not critical and it is the last of these that is the most attractive option. The  partial sale of state owned assets such as Mighty River Power by floating on the NZX is a "WIN WIN WIN"!  

Why? Because it will help pay down Government debt more quickly, it will add considerably to the strength of the New Zealand stock exchange, and it will help temper the love affair that we have with the non-productive residential property sector.

And New Zealand will still have control. The listing will not migrate to Singapore or Sydney.

If, as indicated, Mighty River Power lists at between $2.35 and $2.80 per share and raises between $1.6b and $1.9b, that would be used by the Government to pay down debt shortly after the listing date of May 10. This would be a repayment of about 1.7% of total Government borrowing.

The impact that floats like Mighty River Power have on the sharemarket cannot be underestimated. Most importantly, it adds another blue chip equity to the small  NZX that has had a drought of quality new listings. For many of the 440,000 New Zealanders who have registered to buy shares, this will be a new form of investment and away from residential property.

It will also be an attractive investment for NZ Inc related investment entities such as ACC and the NZ Superfund, not to mention the many other large institutions that are looking for quality investments on the New Zealand market.

And this type of privatisation is extremely important for KiwiSaver funds. There are currently 2,077,846 New Zealanders enrolled in KiwiSaver at February 2013 with 64,000 more women enrolled than men. In the 2012/13 financial year there were combined contributions from the Government, employees and employers of $2.1b, but this will increase to $3.15b in the next year following changes to KiwiSaver contribution levels.

This fresh contribution of $3.15b needs to be invested and what better place than blue chip partially floated New Zealand shares resulting from asset sales.

Adding to that is the possibility we will likely see KiwiSaver made compulsory soon and that could add another 2,000,000 members, thereby potentially doubling both membership and contributions from $3.15b to $6.3b per year - money that must be invested every year.

Already the percentage of money being invested off-shore through the likes of ACC and the Super Fund is too high. However, it continues to increase because of the lack of suitable opportunities here. Mighty River Power is a start in reversing this trend.

Despite our debt problem, there is also much to be excited about. Our economic growth is expected to be 2.3% in the year to March 2013, 2.9% in the year to March 2014 and easing to 2.4% in later years, which will outstrip the growth of Australia, the United Kingdom, Europe and the United States.

Couple this growth with an accelerated asset sales programme and we will really start to see New Zealand progress and give the country the resources to tackle our stumbling education programme, enhance our efficiency with a comprehensive infrastructural budget and wrest back control of our destiny from offshore funders.

Further enquiries, please contact:

Peter Sherwin            
Grant  Thornton Partner, Privately Held Business
T 04 495 3777
E peter.sherwin@nz.gt.com