On the Crafar Ruling, and the New Asset Sales ShortfallFebruary 16th, 2012
Clearly, even when you’ve got a rubber stamp, the rubber can still fall off the stamp. That’s what happened yesterday to the Overseas Investment Office. Its recommendation to ministers that the government should accept the Chinese bid for the Crafar farms was overturned by the High Court – after a New Zealand consortium led by Sir Michael Fay (and including iwi) sought a judicial review of the original decision.
The High Court has now ruled that the OIO needs to apply a fresh test of the economic benefits, one that would – in effect – require the OIO to demonstrate that a foreign purchaser would bring benefits above and beyond those offered by a New Zealand purchaser.
Justice Forrie Miller’s decision yesterday effectively establishes a higher test for the economic benefits to NZ of foreign investment in farms…In his decision, Justice Miller set aside the ministers’ consent and directed them to reconsider the application.
He said the relevant legislation was intended to allow overseas investment in farmland only where it was likely to benefit New Zealand. However, the economic benefits of Shanghai Pengxin’s investment were materially overstated in the OIO recommendation.
Incredibly, the OIO has claimed that it can do this new exercise “in a matter of days”. Really? Such haste risks the perception that the OIO is not treating the court’s direction with the respect it deserves, and is more interested in minimising the political embarrassment to the ministers involved. Fay and Co could well head back to court again, for a full and proper appraisal to be made.
But who knows? We do seem to be living in fantasyland when it comes down to how foreign investment in this country is evaluated. Any sensible person might assume for instance, that any evaluation of the relative merits of foreign and local investment would have to include what flow of profits overseas would result from accepting the bids from overseas buyers, and what downstream effect that might have on the country’s current account deficit, debt position etc etc. Yet that’s not how the OIO’s rubber stamp process actually works, as this morning’s amazing exchange on RNZ demonstrated:
RNZ interviewer Simon Mercep : When you look at the benefits, to what extent do you take into account any disadvantage coming from the sale of foreign land going overseas that affects the New Zealand current account deficit and its international liabilities ? Do you look at that?
OIO manager Annalies McClure : No… the benefit to New Zealand test is framed in very positive terms. So we don’t take detriments into account.
Mercep : Shouldn’t you have an overall view that takes into account [the] detriments?
McClure : We have looked at this question previously, and interpreting the Act that’s certainly the view that our legal advisers have taken.
Consider only the alleged upside, in other words. Regardless, the political stench now surrounding this sale will not be dispelled if the OIO should, in a few days, recommend once again that the government should approve the Chinese bid. That may appease the rulers of China, but it would make a mockery of our foreign investment rules, and the process of judicial review.
Nor would it dispel the sense of political incompetence. As the Greens co-leader Russel Norman has pointed out, the Court has now given the government a valid and higher test that it could legitimately apply to the Crafar farms and to other land coming up for sale in future. Moreover, as Norman also pointed out, in a global situation where the value of land (and the food on which it is grown) is bound to increase dramatically year by year, there is an obvious logic of holding onto the ownership of large blocks of our land – and an obvious illogic in hocking it off at the prices now being offered. In this case, doing the popular thing would also be the right thing. The High Court got it right. The economic benefits of the Chinese bid have been overstated – and clearly, the economic detriments have not been considered at all.
The New Asset Sales Shortfall
It has been a bad week for the government on the asset sales/foreign ownership front. Finance Minister Bill English has seemingly confirmed the long held belief that a full 49% selldown would expose the government to further risk. Mainly because if the private investors who buy in and then want to issue further shares – whether that to be to finance further expansion or to reward themselves – then the government would have to buy half of them to retain its 51% controlling stake.
Therefore, private investors are reportedly urging a less than 49% stake being sold, at least initially, to give them headroom to water down the existing pool of shares. Scoop had warned of this kind of scenario last year, when arguing that it made more economic sense for the government to borrow the money to expand the business of the energy companies, rather than sell down its stake.
With energy prices at the peak of tolerance for consumers, Scoop had pointed out, there was very little room for private investors to reap the profits they would surely be seeking – at least, not within the existing energy company structures.
In all probability, that stellar SOE energy company performance also reflects the pretty harsh prices for electricity that New Zealand consumers have been paying in recent years. Which raises a rather alarming concern about the situation once our energy assets are sold down – because if electricity prices are already sky high, how are the profit expectations of the new private sector investors going to be met? Not by racking up prices, [investment analyst Brent] Sheather agrees. “What they can do is use the famous venture capital saying – that there’s lazy capital there, the balance sheet isn’t being optimised. What we’ve got to do is pay out a special dividend to shareholders and take on more debt…”
Whaaat? So, rather than run the alleged risk of the government taking on more debt up front, we’re going to sell these things – only then to turn around and satisfy the new private investors’ thirst for dividends by taking on more debt, half of which will then be owned by every taxpayer in New Zealand? “I would say that is inevitable,” Sheather replies.” The share market, he adds, usually responds to such special dividends by ramping up the share price even further. Managers then get rewarded, and the taxpayer is left to pay for the bailout if and when the bubble finally bursts.
That’s still a real risk, a bit further downstream. In the shorter term, the reality for the government of a less than 49% selldown is that it will inevitably receive less than the $5–7 billion it was gambling on getting from the asset sales process. Since it had also earmarked that money for social spending on schools and hospitals, taxpayers will be left to feel the shortfall.
Even under the previous numbers, the asset sales were barely a break-even proposition compared to the cost of keeping them and borrowing the money needed for expansion. With this latest development, it looks as though the government has managed to devise the mother of all cock-ups – a sure fire mechanism for losing money on the sale of some of our best state assets.