Bill English admitted yesterday that his new estimate that asset sales will net $6b in revenue, $800m above book value, is just a guess – the midpoint of the previous guess of $5-7b. And that’s not all that’s made up. The forecast foregone profits are way under-estimated. Even with these fiscal frauds, English still can’t get asset sales to make economic sense.
Just on Tuesday, John Key was deriding the official estimates of Solid Energy’s value as “ropey”. Yesterday, English puts out numbers saying they would get 15% more than book value – $6b rather than $5.2b. A number that has been pulled literally out of thin air and over-estimated to try to make the case for asset sales stronger. If you want a real estimate of what Treasury thinks asset sales will bring in, look in the PREFU. It has the new capital spending allowance (rebranded the Future Investment Fund by National) being paid for by just $3.86b of ‘balancesheet funding’ (ie asset sales).
So, English is claiming about $2b extra in revenue in his spin piece called the Budget Policy Statement that Treasury won’t let him put in the real books.
By over-estimating the sales revenue, he also gets to over-estimate the savings in interest costs on the money that would need to be borrowed to otherwise fund new capital spending. Take it down to book value and by the end of the sales process, you’re not saving $266m a year in borrowing costs but $230m.
Then, they’ve under-estimated the dividends and retained profits, which the buyer gets in the form of a higher share price. In the past five years, the dividend flow from the shares National wants to sell has averaged $326m but they’ve only booked $200m a year in lost dividends in 2016. Now, that doesn’t make any sense – would you put money into a company for a dividend flow of 3.3% when you could lend the money risk-free to the government instead at over 4%? No. Because the real dividend flow is actually higher and, if it wasn’t, private buyers would just pay less. Even total foregone profits would be just a 6% rate of return on English’s numbers. That’s below what you expect to get in the long-term with money in the bank or by paying off your mortgage. Again, the real return for shareholders of dividends plus capital gain on the shares for these companies has been much higher – about 15%.
English has tried to over-estimate how much private buyers would pay and under-estimate how much the government would lose in foregone profits to try to make his ideological asset sales programme make sense. Even then, it doesn’t add up. The total foregone profits in 2016 on English’s numbers is $360m while the avoided borrowing costs is $266m. Even on these cooked numbers, the operating surplus (OBEGAL) is nearly $100m a year worse off because of asset sales. The reality would be much worse.
English acknowledges this but tries to fob it off saying asset sales “will be roughly neutral and we will have significantly less debt”. Well, remember last time English said something was fiscally neutral? It was the GST hike/income tax cuts. Those ended up costing $1.1b in their first nine months, well above the $400m official estimate.
In the long-run the government would end up with more debt from asset sales as it is forced to borrow more to cover the lost income from profits. And those profits will be flowing overseas, making us poorer as a country.
Is this what we want for New Zealand? To end up poorer and with reduced control over our crucial energy infrastructure?
Well, remember that it’s in the hands of one man to stop this: Peter Dunne. The rest of Parliament is split 60 v 60 on asset sales. He has the casting vote. So, what will it be, Peter?