Tesla battery manufacture/R&D should be state owned. Put renewable energy battery backup innovation back by decades @Greens

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Sinclair Davidson on privatisation

Privatizing local bus services could save $5.7 billion

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650m of the world’s poorest are without access to good drinking water

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@GarethMP @jamespeshaw need message discipline on @NZGreens as honest brokers

Yesterday morning, Green MP Gareth Hughes posted a British Greens’ video about how other politicians are a bunch of squabbling children but the Greens are above that. It’s only the Greens who offer a “true alternative to the establishment parties” and their “same childish Punch & Judy politics”.

Later that same day Greens co-leader James Shaw posted a video that shaded the truth about the history of dividends from Kiwibank as a way of scoring points of the National Party led government.

Shaw claimed that the government is extracting more and more dividends from Kiwibank rather than letting it keep those profits as capital on which the government owned bank can be a more aggressive competitor.

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Source: Kiwibank pays its first dividend of $21 million to Government | Stuff.co.nz.

Shaw is vaguely correct in that it is dividends plural when referring to Kiwibank’s dividends. Kiwibank paid dividends of $21 million last year; and $750,000 the year before. Kiwibank has paid two dividends to New Zealand Post in its entire history since 2002.

It shades the truth to say that the government is extracting more and more dividends from Kiwibank when when it has only paid one dividend worth mentioning, which was last year.

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Source: New Zealand Treasury – data released under the Official Information Act.

As for James Shaw’s claim that the entry of Kiwibank made banking in New Zealand much more competitive, Michael Reddell disposed of that by linking to a 2013 Treasury assessment of competition in retail banking.

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Source: New Zealand Treasury Official Information Act Releases.

There are no excess profits in the New Zealand banking market for Kiwibank to undercut. Entry barriers are low, banking products are easy substitutes for each other between the competing banks, and the banks compete for market share by advertising  of, for example, special packages to switch banks.

Adding to the analysis of the Treasury, Posner and Easterbrook suggest that these industry behaviours together are suspicious.

  1. Fixed relative market shares among top firms over time.
  2. Declining absolute market shares of the industry leaders.
  3. Persistent price discrimination.
  4. Certain types of exchanges of price information.
  5. Regional price variations.
  6. Identical sealed bids for tenders.
  7. Price, output, and capacity changes at the time of the suspected initiation of collusion.
  8. Industry-wide resale price maintenance or non-price vertical restraints.
  9. Relatively infrequent price changes; smaller price reactions as a result of known cost changes.
  10. Demand is highly responsive to price changes at market price.
  11. Level and pattern of profits relatively favourable to smaller firms.
  12. Particular pricing and marketing strategies.

As the Treasury noted in its analysis, there are several small banks offering competitive rates that would allow them to expand if they offered value for money over the existing offerings. Returns on equity of the big banks are not discernibly higher than for the smaller ones.

To add again to the Treasury analysis, it is not easy to organize a cartel. There are markets to divide, prices to set, and production quotas to assign. The best place to be in a cartel is outside of it undercutting the higher price and selling as much as you can before the cartel inevitably collapses. Brozen and Posner suggest the following pre-conditions to collusion:

  • market concentration on the supply side;
  • no fringe of small sellers;
  • high transport costs from neighbouring markets;
  • small variations in production costs between firms;
  • readily available information on prices;
  • inelastic demand at the competitive price;
  • low pre-collusion industry profits;
  • long lags on new entry;
  • many buyers (otherwise selective discounting to big buyers will be too tempting while monitoring adherence to the agreement will be difficult);
  • no significant product differentiation;
  • large suppliers selling at the same level in the distribution chain;
  • a simple price, credit and distribution structure;
  • price competition is more important than other forms of competition;
  • demand is static or declining over time; and
  • stagnant technological innovation and product redesign.

Stable collusive arrangements are thus likely to be rare because the absence of any of the above conditions will tend to undermine the potential for successful collusion.

Successful cartel operation is even harder than its initial formation. Members of the cartel must continue to believe that they enjoy net profits from participating in the collusion.

The more profitable the collusive price fixing, the greater the incentive for outsiders to seek entry to compete. In cartel theory, these new entrants are known as interlopers.

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The more numerous the participants in the cartel and the more lucrative the collusion, the greater the temptation for individual members to cheat and the greater the fear of each that some other member will cheat first.

Cartel members that cheat early profit the most from the cartel price before it collapses. That is why the history of cartels is a history of double-crossing. Long-term survival of the cartel has two fundamental requirements:

  1. cheating by a member on the cartel prices, outputs and market shares must be detectable; and

  2. detected cheating must be adequately punishable without breaking-up of the cartel.

If banking was a cartel, you would not see advertising on the TV every night inducing customers to switch but you do. That advertising is cheating on the banking cartel the New Zealand Greens want to break up.

There is an infallible rule in competition law enforcement. It arises mostly crisply in merger law enforcement. If competitors oppose a merger, the merger must be pro-consumer. If the merger is anti-competitive, that merger will increase prices. The competing firms can follow those prices up and profit from the weakening of competition subsequent to the merger.

@NZGreens expand KiwiBank into wrong market to cut mortgage rates @JulieAnneGenter

The Greens want to cut mortgage rates by having KiwiBank expand in business lending. Wrong market.

This expansion into a market that is not the mortgage market is to be underwritten by a capital injection as the Greens explain:

    1. Inject a further $100 million of capital in KiwiBank to speed its expansion into commercial banking;
    2. Allow KiwiBank to keep more of its profits to help it grow faster; and,
    3. Give KiwiBank a clear public purpose to lead the market in passing on interest rate cuts.

Note well that the $100 million capital injection is to expand in to commercial banking. More aggressive passing on of interest rate cuts may jeopardise credit ratings if this lowers the profitability of KiwiBank. KiwiBank has an A- rating

The bigger hole in the policy is the more aggressive mortgage rate setting by KiwiBank will be done by keeping more of its profits and paying fewer dividends to its parent company Kiwi Post and through that to the taxpayer. There are next to no dividends currently to stop distributing to fund a more aggressive mortgage rate setting policy.

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Source: KiwiBank pays its first dividend of $21 million to Government | Stuff.co.nz.

KiwiBank paid its first dividend last year. Prior to that, the bank kept all profits to allow it to expand its lending base. $20 million in foregone dividends does not go far given the actual size of all  lending markets in New Zealand.

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Source: G1 Summary information for locally incorporated banks – Reserve Bank of New Zealand.

KiwiBank is minnow in the mortgage market and a pimple in commercial lending. Rapid business expansion is risky in any market, much less in banking.

The government has declined further capital injections so profits were retained to meet capital adequacy ratios. The government in 2010 earmarked NZ$300 million for an uncalled capital facility for NZ Post to help maintain its credit rating and KiwiBank’s growth.

Saving the best for last, KiwiBank last year announced plans to borrow up to $150 million through an issue of BB- perpetual capital notes to be used to bolster the bank’s regulatory capital position.

The Margin for the Perpetual Capital Notes has been set at 3.65% per annum and the interest rate will be 7.25% per annum for the first five years until the first reset date of 27 May 2020. Kiwi Capital Funding Limited is not guaranteed by KiwiBank, New Zealand Post nor the New Zealand Government.

The Perpetual Capital Notes have a BB- credit rating compared to KiwiBank which has an A- rating. These capital notes were issued in addition to prior subordinate debt in the form of CHF175 million (about NZ$233 million) worth of 5-year bonds.

I doubt that KiwiBank can raise capital through subordinated debt under normal commercial conditions if it does not plan to seek profits in the same way as other commercial banks do. The current issue of Perpetual Capital Notes are already rated as junk bonds:

An issue of $150 million of perpetual capital notes from KiwiBank with a speculative, or "junk", credit rating have been priced at the bottom of their indicative margin range.

The closest the prospectus for these Perpetual Capital Notes got to complementing KiwiBank changing from a normal business to being a public good is the following risk statement:

Kiwibank’s banking activities are subject to extensive regulation, mainly relating to capital, liquidity levels, solvency and provisioning.

Its business and earnings are also affected by the fiscal or other policies that are adopted by various regulatory authorities of the New Zealand Government.

The interest rate on this subordinate debt will go up to offset the additional risk  of aggressive lending and aggressive expansion, which will cancel out many of the advantages of not having to pay for dividends and the capital injection.

That discipline is one of the  purposes of subordinate debt in the regulatory capital of banks. This is to provide another pair of eyes and ears to watch the performance of the bank and through rising costs of lending and risk ratings, signal trouble of imprudent lending and lack of cost control.

The proposal to use KiwiBank to lower mortgage rates does not add up. KiwiBank does not pay much in the way of dividends to fund such a foray.  KiwiBank is already far more leveraged than any other New Zealand major bank.

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Source: NZ trading bank leverage | interest.co.nz

Landcorp dividends and capital injections, 2007 – 2015 @dbseymour @JordNZ

As cash cows go, Landcorp has had $2.25 million more in capital injections from taxpayers than it returned to them in dividends since 2007.

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Source: data released by the New Zealand Treasury under the Official Information Act.

Those $1.5 billion in assets in Landcorp do not appear to be worth a cent in net cash to the long-suffering taxpayer.

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Source: data released by the New Zealand Treasury under the Official Information Act.

Landcorp is a state-owned enterprise of the New Zealand government. Its core business is pastoral farming including dairy, sheep, beef and deer. In January 2012, Landcorp managed 137 properties carrying 1.5 million stock units on 376,156 hectares of land.

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@GarethMP proves the case for privatisation when arguing against privatisation

Green MP Gareth Hughes today nailed the case as to why governments should never run businesses. Too many MPs simply do not understand what dividends represent and what the profits from asset sales represent.

Hughes was reported today saying that taxpayers lost nearly $1 billion in dividends since the recent privatisations of power companies. He is the Green party spokesman on state owned enterprises.

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Source: Asset sales cost hits $1 billion | Green Party of Aotearoa New Zealand.

Does the Green Party understand that an asset sells for a price equal to its risk-adjusted discounted net present value of the stream of dividends. When you sell a financial asset, you cash out the net present value of the stream of dividends that might have come from those assets.

The Greens, who are prissy about government transparency and dishonesty of their opponents, did not mention the $4.7 billion in revenue from the asset sale. Taxpayers now receiving more in dividends as a part owner of the privatised power companies than they did as a full owner.

Hughes had the cheek to complain about the politicisation of those privatisations such as favourable terms for small share buyers. That inability of governments to even sell an asset competently is a strong reason why governments should never run businesses in the first place.

If an asset cannot be sold in the full light of day –  a major issue in an election campaign and a referendum – without the sale price that is politicised, what is the chance of good management of any state-owned enterprise when it is not the central focus of opposition scrutiny?

It is been many years since dividends from the state-owned enterprise portfolio has been a net positive cash flow for the taxpayer, as the chart below shows.

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Source: New Zealand Treasury – data released under the Official Information Act.

KiwiRail and Solid Energy gobbled up whatever dividends came out of the power companies. Aside from power companies, state-owned enterprises not really offer much in the way of dividends to the taxpayer as the chart again shows.

Commercial evaluation of KiwiRail, Solid Energy and total SOE portfolio in New Zealand since 2007

Two dogs of an investment propped up a $20 billion portfolio that a few years later was worth less than 1/5 of that. Both of these stalwarts are now worth not even one dollar.

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Source:New Zealand Treasury – information released under the Official Information Act, January 2016.

NZ state-owned enterprise dividends & cash injections since 2007 – updated

With a straight face, the Labour Party and the Greens claim that state-owned enterprises should not be sold because taxpayers give up the future dividend stream.

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Source: New Zealand Treasury – data released under the Official Information Act.

Leaving to one side what the sale price is the net present value of, for as far back as I could obtain data from the Treasury, it is a rare year in which the taxpayers does not pour more money into state-owned enterprises than they get back in dividends.

Transpower is carrying the entire state-owned enterprise portfolio. Earlier on, Solid Energy – a now bankrupt coal mining company– was carrying the portfolio in terms of cash flow to the taxpayer.

KiwiRail commercial valuation since 2007 @JordNZ @dpfdpf

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Source: New Zealand Treasury – data released under the Official Information Act.

Alfred Marshall on @johnmcdonnellMP socialism with an iPad

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Private police reduce crime by more

The commercial valuation of the New Zealand state-owned enterprises portfolio since 2007 with and without Solid Energy and KiwiRail

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Source: The New Zealand Treasury – data released under the Official Information Act.

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Source: The New Zealand Treasury – data released under the Official Information Act.

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