Nanny trustees botch Vector numbers

Friday 17th September 2004

What an enormous disappointment John Collinge has become to his former political allies. National party stalwarts must cringe with embarrassment whenever the party's former president opens his mouth. Auckland Citizens and Ratepayers Now must surely be determined to jettison him at the next local body elections.

Collinge's utterances on the proposal to part-privatise Vector are so simple-minded as to be astonishing, yet they, and others of the same ilk, find all too ready space in the left-leaning media.

The New Zealand Herald, for instance, in June ran pieces by both Collinge and his fellow on the Vector trust's anti-privatisation faction, Shale Chambers, within a week of one another but nothing from sale supporters.

The anti-sale faction has established a litany of arguments, which is routinely trotted out in the media without any critical analysis.

Yet in every case they are based on highly questionable premises. They are little more than scare-mongering.

Consumer ownership, Collinge has argued, means there is "public oversight of the company to try to ensure security of supply to its consumers that is, to guard against shortages and blackouts."

Really? And what makes Collinge and his fellow elected politicians on the trust so fabulously well-qualified to achieve this?

Wasn't Vector's predecessor, Mercury Energy, consumer-owned when the lights went out in 1998?

And, incidentally, did Collinge not chair Mercury's progenitor, the Auckland Electric Power Board, until 1992 when Mercury was formed? And didn't the poor maintenance that cause the blackouts extend back to his stewardship?

Another Collinge myth is that the undergrounding of overhead lines would be threatened if 25% of Vector was sold.

Why? The trust would still own 75%.

The answer was presumably provided in Chambers' companion piece, in which he opined that "anything less than 100% [community] ownership ... effectively surrenders any control of the company to the market. The culture of a company changes, and the management and the board measure success by the needs of the market, not by the views of its majority shareholders."

Really? If Vector trustees, with 75% and the right to appoint a board majority, didn't agree with the way the board was running things, they could quite simply sack the board. If they had an inch of spine, that is.

Chambers' culture change presumably works by osmosis, with the poison of market forces seeping in through the airconditioning system and corrupting the minds of directors and management.

Yet another anti-sale myth, and the most nonsensical and damaging, is that Vector's consumer owners face an effective cut in their annual power bill discounts because they will have to share Vector's dividends with the new shareholders.

That is to ignore entirely the very reason Vector wants to sell shares in the first place to raise money to invest in profitable growth.

In the present instance it wants to bid for NGC, one of the country's largest energy infrastructure companies.

Local ownership cranks should note that only if a Vector bid is successful will NGC will be majority New Zealand-owned. In short, the trust will forego 25% of a smaller dividend stream to gain 75% of a much larger dividend stream.

NGC's dividend payout makes it one of the highest-yielding companies on the New Zealand Exchange. Even if Vector succeeded only in buying AGL's 66% controlling stake, it would be entitled to a fully imputed dividend payment of $55.5 million.

The latest dividend declared payable to the Vector trust is $48.6 million.

Were Vector to sell sufficient new shares to dilute the trust's holding to 75%, the trust's dividend entitlement would be reduced to $36.5 million.

Assuming all of the NGC dividend was paid out by Vector in cash, the trust would get a further $41.6 million, taking the total to $78.1 million, a 61% pay rise.

This sort of numberwork is not brain surgery and it's astonishing the pro-sale lobby has failed to put it before the Auckland public.

There are, of course, complications.

At the current NGC share price, and assuming Vector got $500 million for 25%, it would have to take on a further $365 million of debt to buy AGL's stake.

At, say, 8%, that would cost it about $20 million a year more in interest after tax. That would be money not available to pay dividends either to the trust or to the "outside" shareholders.

So reduce the trust's income by $15 million, to $63.1 million. Still way above the status quo.

If Vector bought AGL's stake it would also have to bid for the whole company.

At the current share price, buying all of NGC would cost $1.3 billion. If $500 million was equity-funded through a share sale, additional debt would be $800 million, costing $43 million a year. Of which the trust's 75% is $32.2 million.

But Vector would also receive all of NGC's dividend $80.9 million, of which the trust's 75% share is $60.7 million. So its income rises to $64.9 million.

So the $170 a household power bill discount just announced rises to $227.

And Vector would have become a large company even by Australian standards, capable of participating in a hugely expanded range of the opportunities its sector is throwing up on both sides of the Tasman.

Those to whom "free markets" are dirty words suspect there is a plot afoot here to do away with the nanny trust and hand out its Vector shares to beneficiary account holders.

Wouldn't that be a terrible thing actually regarding people as being capable of looking out for their own interests?

Comments from our readers

No comments yet