The full direct and indirect costs.

The LabourGreen spin on their power plan is that it will cut the nation’s power bills by up to $700 million a year, lowering household power bills by up to $330 a year, and giving the economy a $450 million annual boost.

Mark Warminger, Portfolio Manager at Milford Asset Management, says that analysis is naïve and does not take into account the full direct and indirect costs.

NZ currently has $253bn of external debt and each 0.01% movement in the cost of debt adds $25m in interest payments. The uncertainty caused by the Labour/Greens Nationaliation by stealth policy is likely to add up to 1% to the cost of debt for New Zealand, due to lenders requiring an increased return for lending to a nation with political and economic instability. The cost of capital for all New Zealand companies will rise due to the same factors. A 1% increase in debt servicing costs for New Zealand’s overseas borrowing, in time would add up to NZ $2.5bn a year to the debt bill.

In addition to higher financing costs for the economy as a whole, the Government would receive around $450m a year less in dividends from the state owned power companies. The state owned power companies would need to write down asset bases by around 30% on an asset base of $15bn. This equates to $4.5bn of capital destroyed.

The flow on effects to New Zealand’s listed power companies is just as detrimental. Analysis suggests that share prices for Contact Energy, TrustPower and Infratil could on average fall by 20%. This is around $1bn loss of wealth for New Zealanders when adjusted for overseas ownership of these companies. On top of this there will be a cut in dividends for the listed companies of say 20%, further reducing returns to New Zealand shareholders. This will adversely affect many KiwiSaver schemes that have direct exposure to these companies.

It seems inevitable should the Labour/ Greens proposal be enacted that the listed power companies would take legal action, based around property rights. This is likely to be lengthy and costly with the Government footing much of the bill.

In conclusion, to save $700m per annum from our total electricity bill the direct and indirect costs of such a scheme would be in the order of the following; $2.5bn in additional debt servicing costs, $450m reduction in dividends, $4.5bn asset write-downs from State owned enterprises, $1bn of capital destruction of the listed power companies and a reduction of $100m of dividends per annum to New Zealand shareholders. In addition, there will be highly skilled jobs lost as power companies reduce capital expenditure and development. In the short term this will not be an issue whilst demand catches up with supply but by the time supply and demand are in balance it will be too late to add additional capacity in a timely manner.

Rolling blackouts anyone?

Other financial advisers have raised similar concerns.

Who do you believe – politicians desperate to be in government or a professional who understands finance and the markets?

4 Responses to The full direct and indirect costs.

  1. Armchair Critic says:

    Gosh, this really has got a whole lot of people into a right tizzy. The toys have very much left the cot. Please let it carry on, the behaviour reminds me very much like the government’s back in late 2007 and through to the end of 2008.
    The threat of rolling blackouts is merely a more modern version of reds under the bed, it’s scare tactics based on nothing of any substance.
    In reply to the question you posed at the end of your post – who do I trust, the politician looking to be elected or the financial advisor with the vested interest? That’s a tough one. I have very little trust in either. Financial advisors have brought us the GFC and there was the string of finance company collapses and we’ve seen a whole lot of rich old white men standing in the dock being found guilty over the last few years.
    But on the other hand our politicians are not that good either, they have forgotten all kinds of donations and phonecalls and shares and gone back on promises not to raise tax and had all sorts of problems keeping private information private and that minister of education, wow, she’s a rolling disaster.
    So it’s a tough choice, but since you asked I will go for the politicians because fewer have been jailed lately. And I will vote for the ones that have stuffed up less visibly.

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  2. fredinthegrass says:

    Interesting logic AC. I agree it is a tough choice, but IMHO you err favoring politicians. They tend to distort the truth for their political future.
    The financial advisory industry has a rather shaky record of recent times.
    But a financial commentator is less likely to distort the truth and recently I get the impression from commentaries I have read the current situation regarding power prices is not overly out of sync either way. The distortion portrayed in the media is largely a beat-up. I accept there are issues – Tiwai Point, generation capacity, future growth requirements to mention three. Short term planning does not work as evidenced by recent events in the power industry.
    Evidence also suggests to me that political interference is unlikely to produce the results its adherents claim.

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  3. Armchair Critic says:

    Thanks fredinthegrass. Do you think the criterion I used, “number sent to jail”, set a standard that was too low, or is it too simplistic? I’m happy to reconsider based on other criteria.

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  4. fredinthegrass says:

    Partially too simplistic, AC, and partially comparing apples with pears. To me the accountability of politicians is subject mainly to the ballot box, whereas business folk face the judicial system.
    The latter I fully approve of , the former seems to me to allow politicians to “hide”. This to me is an unsatisfactory criteria to base your argument.
    ….”I will vote for the ones that have stuffed up less visibly”…. taken further means you will be voting National – the evidence overwhelmingly supporting this!

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