Archive for October, 2009
Friday, October 30th, 2009
Treasury Secretary John Whitehead looked a bit coy this week when journalists asked him whether any of the bombshells dropped in his department’s latest 40-year fiscal outlook could ever be managed politically.
“I’m not a political expert,” he demurred, “but I’m sure the politics are very difficult.”
A delightfully disingenuous statement for a public servant leading the most influential economic policy advice agency, presenting a report whose cover carries pictures of schoolchildren, summer at the beach, and a much smaller image of someone actually doing some work. This is a public relations document.
Whether you think it’s OK for the Treasury to state views about reform options that are routinely damned as “right wing” in New Zealand will depend on whether you are bothered or not about the allegedly unduly politicised “Plain English” campaign run by TVNZ7. I’m not.
And if no one says some of the things the Treasury is saying, who will?
Saying things like that there’s nothing wrong with NCEA and that it’s helping New Zealand kids do as well as their international peers, and often somewhat better.
Or that smaller school class sizes don’t necessarily make any difference to the achievement of all but a few very disadvantaged pupils.
Or that GST needs to be higher? Or that public policy should concentrate on whether people are healthier or crime rates are falling, rather than how many doctors there are or how many more prisons?
Or that the 25% of pensioners who only rely on the pension for 20% or less of their income should get less in exchange for a bigger spend on the health system?
Or that economic growth alone is not the answer? That even if we double productivity growth from 1.5% to 3% a year and have 15,000 new migrants arriving each year instead of 10,000, we are still planning to spend too much, and that net public debt will still blow out from under 20% of GDP today to between 146% and 223% by 2050.
Even if the assumptions which drive those numbers are inevitably a guess, a completely unsustainable trend is clear, and that’s what the Treasury wants us to think about.
On the subject of prisons, the report is both particularly strong and completely out of step with prevailing political wisdom. The Treasury can’t quite say “this is a nationally embarrassing waste of money”.
But it does say: “Spending in the justice system doubled in inflation-adjusted terms from 1994 to 2009. The increase in spending has not been linked to recorded crime rates, which have been broadly stable over the same period.”
Yet in the past 10 years, the prison muster has risen from 150 people per 100,000 to 195 per 100,000, putting New Zealand fifth in the global gaoling stakes, just below Mexico, the Czech Republic, and Poland. Everyone is miles behind America’s 760 prisoners per 100,000 citizens, which is a very scary thought.
At current growth rates, New Zealand will be imprisoning 225 people per 100,000 eight years from now, when the Government says it will only have $1.1 billion (inflation-adjusted) a year available for new spending initiatives.
If that all comes to pass, prisons will be taking one in five of those few available dollars for new spending. Is that what we all want? the Treasury asks.
When you put it like that, it cannot be what people want, despite the never-ending calls for ever tougher sentencing. In the meantime, the corrections industry is helping buoy the construction industry, so that recession-busting fiscal stimulus is partly thanks to gaol-building activity. Hardly a great outcome when you think what that kind of money could do in hospitals, schools, universities and just about anything else you care to name.
The Treasury argues, in classically bland prose: “It is not clear that further increasing our imprisonment rate would be the most effective way to reduce crime. Some studies have shown that, while imprisoning more people can reduce crime, the size of that impact diminishes as imprisonment rates increase.
“Other studies suggest that, when imprisonment rates reach a certain level, further increases can lead to increases in crime rates.”
This is not coming from some woolly woofter Nanny State bit of the bureaucracy. It’s the Treasury, the hatchet-men, arguing what amounts to both a fiscally conservative and a human rights agenda.
What should justice policies try to achieve? How about lower crime rates, and at a cost the nation can afford? There’s nothing to show either of those things is happening as part of the current politically driven corrections boom.
“Given that New Zealand’s imprisonment rate is already one of the highest in the OECD, and recent increases have had little impact on recorded crime rates, it is unlikely that further increases in our imprisonment rates will be the most cost-effective way to achieve lower crime rates,” the Treasury concludes.
Tell that to the nutters at the Sensible Sentencing Trust, in whose thrall most of the political parties remain.
Thursday, October 22nd, 2009
I was only $10m off the mark.
In an earlier blog I estimated, after trawling through 40 or so sets of accounts, that KiwiSaver providers had charged a collective $26m for their efforts in the 12 months to the end of March this year.
However, the true figure was closer to $36m, which bumps up the asset-based cost (based on funds under management of $2.6bn at March 31) of KiwiSaver to 1.4 per cent – still cheap maybe.
The $36m figure appears in the annual report published by the Government Actuary (GA), the body responsible for supervising the KiwiSaver providers, and should therefore be much more accurate than my attempt.
For a government agency with such a wide brief (including superannuation funds as well as KiwiSaver providers) the GA is woefully under-resourced but it does a good report: you can download both the KiwiSaver report and another publication surveying the old-style superannuation funds here.
The reports are companion pieces really and should be read in conjunction with the one (KiwiSaver) revealing an industry full of youthful exuberance and the other detailing an aging business that, while not quite dead, is looking a bit poorly.
KiwiSaver is probably sucking some of the remaining life out of the established superannuation schemes as the GA report notes: “There is substitution, but it will take a significant exercise to establish more accurately the trends without waiting for a further two years of data.”
I can’t see the GA securing further funding for this exercise.
The GA publications have not received wide coverage, drowned out by the blah surrounding the ACC report, although the financial figures at stake are similar.
Also ignored was the IRD annual report, which was published at the same time – I guess you can get report overload. After reading the IRD report I had to upgrade my cost of KiwiSaver numbers. The tax department has spent at least $40m on IT to manage the scheme and buried in there somewhere should be another figure revealing how much the IRD spends each year on the hundreds of staff who are paid to answer your irritating questions about KiwiSaver.
Tuesday, October 20th, 2009
Woke up this morning to hear new ACC chair John Judge bleating on about the $4.5 billion loss the government-owned insurer has incurred.
Briefly thought about paying my levy early – as a gesture of goodwill and support – but then read the accounts and decided the ACC ship would stay afloat until the, inordinately large, annual contribution it demands from me falls due.
As the New Zealand Herald editorial noted in the wake of the panic: “Several questionable notions are behind the Government’s doom-laden prognosis of ACC’s future costs.”
You can find those notions on page 36 of the ACC annual report as, after due actuarial process, over $5 billion was added to the scheme’s “outstanding claims liability”.
Page 35 contains quite a good explanation of how the actuaries came up with the number. I’m sure it all makes sense and was in full “accordance with the standards of the New Zealand Society of Actuaries Professional Standard No. 4:
General Insurance Business and New Zealand Equivalent to International Financial Reporting Standard 4: Insurance Contracts”.
Page 124 expands on some of the updated assumptions used by the actuaries, which includes a change in projected hourly labour rates that bumped up the outstanding claims liability by $1.3 billion.
As with any half-decent actuarial projection, however, the ACC outstanding claims liability forecast comes with a rider: “The actual outcome is likely to range about this estimate and, like any such forecast, is subject to uncertainty.”
I didn’t hear the whole Judge interview so maybe he mentioned that. I also never heard him compliment the ACC investment team, which did a terrific job over the year in difficult circumstances.
With over $10 billion under management, the ACC investment pool is the second-largest in the country, behind the $14 billion New Zealand Superannuation Fund
The team, headed by Nicholas Bagnall, beat all its benchmarks and even made some money during the now-forgotten financial crisis, despite having almost $300 million or so tied up in some ‘illiquid’ mortgage-backed investments such as Property Finance Securities.
No doubt, ACC could do with some reining in but to portray it as a basket case is misleading.
But I still want to know how the ACC came up with the absurd figure on my invoice – what’s so dangerous about my desktop? Mr Judge – I’ll pay you next week.
Monday, October 19th, 2009
Your trusty Wellington correspondent turned up to the Solid Energy “annual general meeting” in the Ilott Theatre at the Wellington Town Hall last week, keen to sample an SOE’s version of a listed company AGM.
It was pretty much the same – the board lined up in a row looking a bit stunned, the Powerpoint presentation, the throwing over of tricky questions to hapless senior managers and so on.
Not quite so normal was both the size and the number of bouncers on every door to the event, presumably in anticipation of environmental protest. In the end, it was a tame crowd of bureaucrats, energy sector hangers-on and journalists.
A bloke with quite long hair and a beard did ask a very polite question at one stage, creating a perceptible frisson among the ear-piece wearing security guards. But in the end, as is often the case with these things, the main enemy was the overpowering urge to nap.
This has been a huge week for State-Owned Enterprise annual reporting.
Genesis Energy, Meridian, MightyRiverPower, Transpower, Solid Energy, Kordia (something telecommunicational that owns Orcon); and a host of government agencies have issued annual reports in the last week.
As one of the truly devoted, I’ve read most of the energy SOE annual reports, Statements of Corporate Intent and been to their profit briefings. All of them have been ordered by the SOE Minister Simon Power to stop arsing about and make some money.
That is particularly the word to the likes of Genesis and Meridian, the largest retailer and generator in the country respectively.
Genesis has responded by refusing to run the ageing 1000 MW Huntly plant in the national interest rather than for a commercial return. That should pick its sub-2% return on equity carcase off the floor, especially if it can get first-mover advantage with its huge retail customer base – at 680,000 an enviably large total by New Zealand standards.
In being told to act like listed companies, the SOEs are doing so. There is a certain kind of investor relations presentation from a big listed company that involves very often using the conference room of a major law firm, high above Wellington harbour, looking at that extraordinarily beautiful backdrop.
There are complicated pieces of equipment which, these days, generally tend to work.
Then there are the annual reports themselves.
The Genesis report is quite Alternativski – an adventurous execution in a post-credit crunch world.
It comes in two bits, in a paper size that is quite obscure – as tall but much wider than A4 – and they come in a rather elegant corrugated cardboard box emblazoned with the word “Open,” which is actually one of Contact Energy’s better brand values.
The first part, “Open Conversations,” is a blizzard of text, punctuated by the arresting photography of Blackbox’s Chris Williams.
The second part, on less opulent paper, is the financial statements, which confused me a bit.
It was definitely distinctive and probably not unduly expensive, but quite arty for a big company reporting a loss.
Then Solid Energy had its annual general meeting as described. The annual report is a weighty tome but relatively easy to navigate. Very hard to make what the report says about environmental impact and the way Don Elder says it match up. Solid Energy is saving snails for Africa and a whole lot of other stuff, but they do have a net negative impact. What the report seems to say vs what Don Elder says as he glides rhetorically across a complicated Powerpoint graphic is hard to square.
Meridian’s annual report is almost weirdly thick, on some kind of recycled cardboard, reporting even on the process of reviewing the annual report. There was some interesting new detail on the Tiwai Point dispute, and it says that Powershop, Meridian’s on-line retail play is targeting 75,000 customers. Last I looked, a couple of months back, they had about 3,000.
MightyRiverPower’s report is very straightforward and perhaps, with Solid Energy, the most like a private company annual report. MRP is quietly confident in an Auckland sort of way that it is doing the right things, and the paper the report’s made from doesn’t feel particularly green.
It would probably do fine, maybe even better, if privatised. But then, pigs might fly.
Monday, October 19th, 2009
The traditional carry trade – the NZD/JPY and AUD/JPY – has kicked in again in the last couple of weeks, in line with another surge in global share prices and the recent RBA tightening. Even NZ news added to the pressure with inflation running faster than expected (but not high enough to concern the RBNZ).
In simple terms the driving force appears to be the huge US stimulus. Historically money creation on this scale has created inflation. In recent decades the inflation pressure has tended to come through in asset prices. There in lies the quandary. The global authorities know that facilitating the asset bubbles of earlier years was a mistake, so surely they will respond this time sooner i.e. tighten monetary policy.
Some are doing this already e.g. the RBA. Others such as the BOE are hinting that they are coming round to this thinking. Comments from US Fed Chairman Bernanke will be listened to closely this week.
In the meantime the global good-news story will continue, strong Chinese growth likely to be reported this week and probably higher than expected Australian inflation next week judging by the NZ out-turn.
This all adds to short-term upward pressure on the NZD (except against the AUD and CAD, and maybe excepting the GBP now) but the risk of a sharp turnaround remains.
Thursday, October 15th, 2009
We live in a world of acronyms, so here’s another one: QFE.
Also known as Qualifying Financial Entity, the QFE concept was dreamed up to fast-track the registration and supervision of financial advisers under the new regulatory regime, which is due to come into effect late next year.
The QFE rules allow any approved organisation – generally only large financial institutions are expected to take on the challenge – to assume responsibility for advisers acting under their auspices.
QFEs will take on some of the workload of the Securities Commission, who will not have to approve and authorise every financial adviser who is caught by the new legislation.
It’s a pragmatic response to a difficult regulatory exercise – estimates of how many financial advisers there are in NZ range from about 5,000 to 20,000 – but it also hands some competitive advantage to financial institutions at the expense of smaller, independent operators.
This week the government increased that power even further with a number of changes to the QFE rules.
Previously, QFEs were only to be responsible for their employees but will now also be able to shield named “contractors” under their regulatory banner.
As well, QFE advisers will be sell a greater range of financial products, rather than only those created by the QFE itself. In the legal language, QFEs will be able to push products down their chains where they are “promoter” as well as “issuer”.
It might seem a subtle change but it allows financial institutions to cut in on the business of independent advisers without necessarily having to jump the same compliance hoops.
Some independent (or ‘non-aligned’) advisers are feeling aggrieved at the changes and warn that the QFE regime could reduce consumer choice, leaving them only to select which bank to buy almost identical products from.
This could happen but one industry insider pointed out to me that independent advisers can survive QFEs.
“It’s already tough being an independent,” he said.
Another acronym can’t hurt.
Monday, October 12th, 2009
Of all the crocodile tears that could ever be shed, the Steve Irwin Grand-Daddies are those shed by taxpayers who push the law to screw the Revenue, and then find out they got it wrong.
That’s all that happened this week in the $961 million tax judgement against Westpac for tax avoidance in the late 1990′s and early 2000′s using structured finance or “repo” loans.
These were popular at the time among foreign-owned banks, which could arbitrage the New Zealand tax system against offshore regimes and choose how much tax they paid in New Zealand.
Similar Bank of New Zealand transactions, worth $564 million in back taxes and interest, were ruled avoidance by Judge John Wild in the Wellington High Court in July, and the ANZ, National, ASB and Rabobank all still face their day in court on their transactions.
Yet already, with the ink barely dry on the findings by the Auckland High Court’s Judge Rhys Harrison, tax professionals and banking executives are crying foul.
These are presumably the same tax professionals and bankers who assumed that moving the Westpac case to Auckland would ensure a more level-headed judicial approach.
Instead, Harrison – a judge known for his particular dislike of being overturned on appeal – has reached essentially the same conclusions as Wild, and added for good measure that Westpac was lucky the IRD didn’t pursue exempt income claimed within the same transactions.
“The banks think this is an absolute disgrace because they had rulings from IRD and things moved 180 degrees,” said one aggrieved Aussie banker, who presumably sought anonymity because the comment is so utterly disingenuous.
Westpac and Bank of New Zealand, whose tax and interest owing totals $1.555 billion before penalties, explicitly sought to engineer arrangements that allowed them to pay as little tax as they liked in New Zealand.
That is not illegal, and the judicial findings so far don’t make anyone a crook. Tax avoidance is unlawful, whereas tax evasion is a crime, and what the banks hoped they were achieving by sailing close to the legal line was lawful tax minimisation. To those who deal in this stuff every day, it’s uncontroversial, and the principle that there is no morality in tax law is sacrosanct.
However, if you push the limits of the law, you are always at the risk of finding you crossed them, and it’s always possible that the judicial pendulum will swing against you.
Crudely put, evidence in the Westpac case showed bank executives and top tax advisers at PricewaterhouseCoopers openly discussing public relations considerations as the only meaningful constraint on how little tax the bank might pay, thanks to repo deals.
PWC chairman John Shewan advised Westpac that declaring tax payable of around 15%, compared with the corporate tax rate of 30%, would be in the same league as its competitor banks and would be sufficient to demonstrate good corporate citizenship.
However, Westpac could probably get away with actual cash tax payments to IRD at a rate as low as 6.5%, since virtually no one other than tax geeks understood the difference between declared taxable income and actual tax paid.
No one was embarrassed about this – it’s just the way big companies think. In fact, witnesses for Westpac insisted that the New Zealand CEO at the time, Harry Price, was “passionate” about paying as much tax as the bank was legally obliged to.
No doubt that’s true, otherwise the other banks would never have mounted these cases against the IRD. Deutsche Bank, in fact, folded its tent on similar issues some time ago.
The two judgements so far are acutely negative publicity at a time when public distrust of banks is on the rise.
Remaining challengers must at least be mulling whether to back out and try to settle with IRD – if IRD will even consider that, given that it’s now on a roll.
The fact remains, however, that the transactions in the BNZ and Westpac cases openly pushed the legislation to the max and beyond.
Both banks relied on IRD binding rulings which related to earlier transactions, then applied the same principles to later transactions rather than seek further binding rulings. That was a calculated risk. Tax practitioners know that binding rulings apply one transaction at a time. The fact that the IRD might change its mind later on another, similar transaction is one of the hazards of the game.
If you fear that enough, you seek a binding ruling on the next transaction. If you don’t, or the IRD turns you down on a subsequent application, that’s a sign that you might be sailing close to the wind. So, to claim now that these judgements make the anti-avoidance provisions of the Income Tax Act unclear looks rather self-serving, when the transactions in question were designed both to test and exploit such a lack of clarity in the first place.
However, as Deloitte’s Thomas Pippos points out, the Westpac and BNZ judgements involve “quite commercial transactions that arbitrage a regime that was deliberately put in place by Parliament.”
Grounds for appeal may yet prove strong. While neither Judges Harrison nor Wild have bought that argument, the Court of Appeal or Supreme Court may yet do so, because it’s in this minefield of “what Parliament meant” that many of the crucial details hang.
And when you consider that most MPs are confused at the best of times on the intricacies of international tax legislation, what Parliament meant in this area is always going to be fuzzy by comparison with, say, rubbing out P gangs or tougher sentencing.
If, however, these judgements stand, and the other bank challenges are unsuccessful, this could net Finance Minister Bill English – or some future successor, once all routes of appeal are exhausted – more than $2 billion in back taxes, interest accrued, and penalty payments.
A tidy win for the taxpayer beckons in the end, and a doffed cap to tax officials who have spent big chunks of their careers on the cases that have been coming to court this year.
Friday, October 9th, 2009
Scrawled across the low, curving concrete wall that borders the motorway on-ramp near the ferry terminal is a word that I would never have expected to see rendered in graffiti form.
But there it is: ‘Kiwibank‘.
What sort of self-respecting tagger would waste their spray-can on daubing the name of a financial institution by an on-ramp?
It is possible the street artist was busted before completing the message – was it to be ‘I H8 Kiwibank’ or ‘Kiwibank 4 Eva’ ? We may never know. But it seems to me this is a great step forward in financial literacy.
The other possibility is that Kiwibank’s advertising budget has been cut dramatically.
It’s not a bad ‘viral marketing’ idea. And the graffiti is strategically placed just past the Westpac Stadium in Wellington.
Perhaps in anticipation of the landmark ruling against Westpac this week, some Kiwibank marketing guru saw a ‘positioning’ opportunity.
In a 200 plus page judgement that almost no-one will read, Westpac was found guilty of tax-avoidance and will have to stump up for a bill approaching $1 billion.
Unless it appeals. And the consensus is – at least in the room I was in when the news broke – that Westpac, as BNZ has done already after losing a similar case earlier this year, will appeal.
Why not? With $1 billion at stake, what’s a few million more for the lawyers?
The bank can surely recoup these costs somewhere else. And if Westpac would rather not squeeze a little more out of its customers, I know where it can save on marketing.
Thursday, October 8th, 2009
Over the 12 months to March 31 this year, KiwiSaver providers collected a total of about $26 million in fees, according to my calculations.
If my calculations are correct – of which I have my doubts – then KiwiSaver has come reasonably cheaply. Based on total funds under management (FUM) at March 31 of about $2.6 billion, a figure I arrived at in my recent KiwiSaver survey, then the whole show has been produced for about 1 per cent of FUM – which in fund manager and superannuation terms is a real bargain.
But as I said, my calculations may be off. Although I believe I did a thorough job, considering the circumstances, my fee numbers didn’t look absolutely, actuarially consistent.
And that’s because there is little consistency in the way KiwiSaver providers report fees. I must’ve waded through 40-odd reports looking for the word ‘fees’ and found it in thousand different places.
Call me suspicious if you like but I’m positive there were other fees lurking somewhere out of my gaze, masquerading, perhaps as ‘management expenses’.
It’s not that providers are necessarily hiding their true fees, it’s merely that there is no agreed standard for how they are reported – a problem that extends across the managed funds industry.
Last week a relatively new fund manager, Pathfinder, issued a challenge to the industry to come clean on how it describes and collects fees. It is true the Investments Savings and Insurance Association (ISI) – a collective of fund managers and insurers – is working on a new fee disclosure standard but you have to wonder why it’s taken so long.
In the interim, my attempt at KiwiSaver fee clarity will be published in this month’s edition of ASSET magazine. Out as soon as I can get it finished.
Tuesday, October 6th, 2009
With riveting article titles like ‘Anchoring fiscal expectations’ and ‘Quality of bank capital in New Zealand’ it’s unlikely that the September issue of the Reserve Bank Bulletin captured the public imagination. My guess is that not one issue in the 71.75 volumes of the Reserve Bank Bulletin published to date has ever captured the public imagination.
And that’s a shame because, from what I understand, the Reserve Bank is a powerful institution that has a significant influence on the direction of our economic and social lives. It could be useful for the public to become familiar with the ideas and people who flow through the Reserve Bank and occasionally pop up in the Bulletin.
I’ve certainly enjoyed flicking through the Bulletin in the last year or so but it’s obvious the content can’t compete with the more pressing mainstream media issues like disasters, sport, weather and celebrity gossip.
Hence the lack of ads, which for someone like me who operates in a more commercial medium is truly shocking. Really, there was a bit of fat in Matthew Wright’s piece ‘Mordacious years’: socio-economic aspects and outcomes of New Zealand’s experience in the Great Depression’ that might have been better filled with a quarter-page vertical (Prozac? Viagra?).
From the bits I skimmed it seemed Wright is arguing that the Great Depression in New Zealand wasn’t as bad as people thought it was at the time – or as he puts it there was “a disconnection between social effects and the economic experience”.
He even quotes John Mulgan, who I only know as the author of ‘Man alone’, the Depression novel we were forced to read in college. I don’t recall anything of the plot but I do remember the dreary, oppressive sense the book induced in me at the time. The man knew about depression – Mulgan died after ingesting an overdose of morphine on Anzac Day 1945.
‘Financial crises, sound policies and sound institutions: an interview with Michael Bordo’, however, adds a cheerier note to the September Bulletin.
It has the funniest line in the entire issue. Recalling his first ever published academic paper Bordo says: “I’d put in a ton of work – it was one of the best papers I ever wrote. Only a handful of people remember it.”
You may be able to track Bordo’s masterpiece down in a back issue of the academic journal ‘History of political economy’.
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