Norman Russel: Mixed Ownership Model Bill — In Committee Speaker Recalled In Committee 
Text is incorporated into the Bound Volume 
Norman Russel: Mixed Ownership Model Bill — In Committee Speaker Recalled In Committee 
[Sitting date: 19 June 2012. Volume:681;Page:3053. Text is incorporated into the Bound Volume.] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I rise to speak on the Government’s Mixed Ownership Model Bill. We will be talking specifically about some of the amendments that the Green Party will be moving to this part but here I want to talk more generally about the essence of the clauses here which is to fundamentally change the ownership structure to remove these companies from being State-owned enterprises to essentially being mixed-ownership model as the Government is calling them. The first thing I think to say about this is that the effect of taking these companies out from the State-Owned Enterprises Act will be to permanently remove the ability of the New Zealand Government to make the New Zealand electricity sector more competitive and I think that has been a missed point in this whole debate. By removing these companies from the State-Owned Enterprises Act so that they are no longer under the control of the Government the Government will remove the ability that it has recently exercised to force these companies to transfer assets around within the system. Because they were State-owned enterprises the Government was able to force Meridian Energy and Genesis Power to move generating assets around in order to meet its idea of what a competitive electricity market would look like. Whatever you might think about that—and I am not convinced that it necessarily did the right thing—by doing this and moving these assets out of the State-Owned Enterprises Act as it does in the clauses in Part 1 it permanently removes the ability of future Governments to alter these ownership structures. Once the Government is a 51 percent owner of these companies it simply cannot direct them to sell some of their generating assets to other companies or sell others of them to buy generating assets from other companies. It is simply not possible because the minority owners in these companies have rights and the directors of these companies are required to consider the best interests of the company as a whole. 
 Once these clauses go through in Part 1 it could well be in the best interests of the company to drive up monopoly prices. In fact that is how you maximise profit in the return to shareholders: drive up monopoly prices. If they were to do that they would be acting in the best interests of the company once these clauses have gone through that move the companies out from the State-owned Enterprises Act. So in fact what the Government is doing is locking into place the current set-up in terms of generating assets within the electricity market by going through with this. If in future we were to discover that in fact the arrangement that we had in terms of the electricity generating assets was not the most competitive arrangement for the electricity market we would no longer have that ability. 
And what we know about the electricity market is that it is deeply uncompetitive. The Commerce Commission in its report in 2009 came to the view that the electricity sector was essentially ripping off the rest of the economy because the way that the market has been established in the sector is deeply uncompetitive. It is not at all surprising: we have a small number of generator-retailers who dominate the market and who have the ability to maximise the price and returns that they get. So by the Government transferring these assets away from being State-owned enterprises and the ability of the Government to put some pressure on them what we are guaranteeing is that these companies can freely pursue their right to charge monopoly rates and monopoly prices. That is what it means. 
When we did the analysis and went through all the different lines companies’ areas and compared the prices that State-owned enterprises charge versus the prices that private companies charge what we found was that basically the private companies are charging around 12 or 13 percent more than the State-owned enterprises. And when you look at the comments from the chief executive officers of the private companies they are very clear that they believe that the State-owned enterprises are undercharging for electricity. When the chief executive officers from TrustPower and Contact Energy have been reported on this issue what they have said is that the State-owned enterprises are undercutting them on price. So by transferring these companies from being in the State-Owned Enterprises Act which is what this Part 1 does and putting them simply as regular profit maximisers as regular companies in the market we remove the anchor that the State-owned enterprises currently provide to the electricity market. In the context of a market that is fundamentally uncompetitive because it is a small market with a small number of dominant players we are removing the anchor that these State-owned enterprises currently provide to price. That is why prices will go up. 
The other argument that this Government has used repeatedly as to why it needs to move them out from being State-owned enterprises is around access to capital. The Government said: “Oh we have to give these companies access to capital and that’s why we have to privatise them or partially privatise them.” But this argument is fundamentally flawed. Think this argument through. What the Government is saying is they need more access to capital. Well who gets the proceeds from the sale? It is not the companies; it is the Government—right? So then how will these companies once they are partially privatised raise more capital? The only way they can do it is to issue more shares. If the Government is to maintain its 51 percent ownership of these companies then half of all the new shares issued have to be purchased by the Crown—51 percent of them have to be purchased by the Crown. Half of all the new capital that will be made available to these companies by issuing new shares has to actually be provided by the Government. 
Is the Government actually going to provide half of all the new capital that these companies want? I think it is very unlikely because the Government has gone on at great length about how it is short of capital how the way the capital has been allocated is extremely irrational and how it does not want to be caught up in these State-owned enterprises and the way they use capital any more. In which case what it means is that the only option is for the Government shareholdings to fall under 51 percent. So all the promises about maintaining 51 percent ownership will come up against the desire of these companies to gain access to more capital and require the Government to provide half of all the new capital which the Government of course will not do. 
The other part about this is the cost of this process of moving these companies from no longer being State-owned enterprises. We asked the Minister of Finance about this today and basically he is saying that we are talking of an initial cost of somewhere in the order of $120 million to $140 million if we get say $7 billion as the Government is proposing. So $120 million will be paid by taxpayers for the privilege of losing control of these companies. For the privilege of giving control of these companies from all of us to a tiny minority of us we are going to have to pay $120 million to $140 million. 
Then on top of that the Government is talking about a loyalty scheme. The way loyalty schemes work is essentially the seller gives away free shares to buyers if the buyers meet certain conditions. In the case of the Queensland Rail privatisation done by the Labor Government in Queensland—of course with the result it got chucked out at the next election—in that example what the Government did was it gave the 16th share for free to those who bought 15 shares and hung on to them for 2 years. That is effectively a 6 percent cost to the seller. If there is a 6 percent cost to the seller in this example in New Zealand if the Government decides to go down the same path then we are talking about up to $400 million that will be forgone as a result of giving away free shares as part of this loyalty programme. When you add that to the $120 million the Government has already confirmed it is planning to spend we are talking about spending somewhere in the order of half a billion dollars of taxpayers’ money in order to sell something that taxpayers already own against the wishes of the vast majority of New Zealanders who are resolutely opposed to the privatisation programme. How can that possibly be the right thing for this Government to do? 
On top of that we have the lost earnings going forward. In the Budget Policy Statement 2011 done by Treasury and the Budget Policy Statement 2012 it said that as a result of the clauses in Part 1 the removal of these companies from being State-owned enterprises and the move to partial privatisation the Government is $100 million a year worse off on its operating balance excluding gains and losses—that is basically the Budget deficit. So it will be $100 million a year permanently worse off year after year after year as a result of the clauses in this bill. If this goes ahead it will add to the Government debt by $100 million a year because the Government debt is fundamentally the result of the addition of all the deficits that this Government runs—and it is a Government that runs very very large deficits. 
So on top of the fact that it is going to have a huge impact in terms of the first round of costs of maybe half a billion dollars of doing the privatisation programme on top of that the Government is worse off by $100 million every year because of the privatisation programme according to Treasury figures in the Budget Policy Statement 2011 repeated again in the Budget Policy Statement 2012. So when the Government says this is fiscally responsible what I suggest people do who are listening to this debate is read the Budget policy statements of 2011 and 2012. Readers will see that this is the most fiscally reckless policy that you could possibly be engaged in in terms of its impact on the Government’s fiscal position. This is really bad policy and it is driven by the fact that they have to pay for the tax cuts for upper-income earners.