English signals asset sale trade-off

The Government has acknowledged that the state-owned power company profits it will lose as a result of partially selling them will exceed the savings from the resulting reduction in debt. 

Commenting on the Budget Policy statement released this morning, Finance Minister Bill English said the plan to sell up to 49 percent of the four power companies and to reduce its stake in Air NZ would result in a $6 billion reduction in net debt. It would also fund new capital investment, such as schools and hospitals.

However, it would also result in a "small'' reduction in the government's operating balance.

"Profits attributable to minority shareholders (foregone profits) will reduce the surplus, which is partly offset by a reduction in finance costs on the reduced debt.''

"Over the mixed ownership programme, the forecast finance cost savings exceed the forecast foregone dividends,'' Mr English said.

"However, those savings are less than the total forecast foregone profits of the SOEs, which include both dividends and retained earnings.

"That is because state-owned enterprises are expected to earn a commercial rate of return that reflects the risk of owning such companies.''

According to the Budget Policy Statement, the Government will book $1.5b a year for four years, beginning in 2013, from the asset sale programme, which begins later this year with the sale of shares in Mighty River Power.

In the first year of the programme the forecast foregone dividends are $50 million against estimated finance cost savings of $54m.

By 2016 the forecast foregone dividends are $200m against finance cost savings of $266m.

However, by then the forecast foregone profits to minority shareholders which include non-cash gains are $360m.

Mr English said the cumulative reduction in net debt resulting from the asset sale programme by 2016 was just over $6b.

In as speech at Victoria University in Wellington last night, Mr English said estimates of foregone profits and dividends were based on four averages of the companies' own forecasts. This morning he acknowledged that the forecasts around the mixed ownership model were not "refined judgements'' but remained rough estimates.

Mr English also said the Government's estimate of raising $6b from the asset sale programme represented sale prices that were in excess of the companies' book values.

This morning he said the fiscal impact of the programme "will be roughly neutral and we will have significantly less debt''.

- Adam Bennett of the New Zealand Herald