Debt savings greater than dividend losses from privatisation
Dividends lost as a result of partial privatisation of state-owned enterprises will be more than offset by the savings on government debt that the sales will allow, Finance Minister Bill English’s Budget Policy Statement says.
The forecasts are subject to considerable uncertainty, since no sales have yet occurred and their timing could change, according to economic and other factors, although the government has included estimated impacts from asset sales for the first time because of the advanced state of the initiative.
First out of the blocks for sale of up to 49 percent of its shares to private investors is power company MightyRiverPower, which the BPS says is on track for an initial public offering in the third quarter of this year.
The projections run for four years, from the year to March 2013 through to March 2016, and assume a cumulative reduction in government debt of $6.1 billion.
It estimates debt servicing cost reductions of $266 million a year, offsetting estimated lost dividends to the government of $200 million a year.
However, when the SOEs’ retained earnings are included, the estimated forecast profits foregone total $360 million, more than the $266 million of savings in interest payments on government debt.
The government will retain at least 51 percent shareholdings in the partially privatised SOEs, and would not normally expect to have access to all of their retained earnings, which are typically used to strengthen balance sheets or fund future development.
English said yesterday it was possible the government may sell less than a 49 percent slice of each SOE, to allow them to raise additional capital to fund growth plans without having to seek new capital from the government.
“Over the mixed ownership programme, the forecast finance cost savings exceed the forecast foregone dividends,” the BPS says. “However, the forecast finance cost savings are less than the forecast forgone profits. This is because state-owned enterprises are expected to act as profitable companies and therefore over time to earn an appropriate commercial rate of return that reflects the risk of owning such companies.
“In effect, the Crown is exchanging an expected stream of income for a (risk adjusted) equivalent amount of cash now.”
The forecasts also assume the government will sell the minority stakes in SOEs at a value greater than their book value and are based on a mid-point for the value of the assets of $6 billion, which themselves are a fraction of the government’s total assets of $245 billion.
The government is justifying the sales on the basis the $5 billion to $7 billion raised will allow investment in new schools, hospitals and other key infrastructure without borrowing more government debt.
Other reasons for sale are given as improving investments available to New Zealanders and deepening the country’s thin capital markets, allowing the SOEs access to new capital without seeking it all from the government, and allowing “sharper oversight” of their commercial performance because they will be listed on the NZX.
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