State Owned Asset Sales Are An Unknown

The Supreme Court recently released a judgment that found partial privatisation of Mighty River Power would not stop the government from compensating Maori for any claims they might have under the Treaty of Waitangi in relation to water rights. This means that the sale of Mighty River Power can go ahead and the National government can chalk up a political win.

The problem with the judgment is that it did not change the fact that the world is still in turmoil. The Federal Reserve and other central banks have been pumping liquidity into the financial system and pushing up the prices of financial assets. The New Zealand sharemarket rose nearly 25% in 2012 and billions of dollars is flowing into the marketplace with Kiwisaver contributions and overseas investors building up stakes in NZX listed firms.

But are state owned enterprises really fit for an NZX listing? The financial troubles of Solid Energy should give potential investors in Mighty River Power cause for concern. The fact that a coal mining company could make a mistake with something as important as trends in the global coal price, leading to a massive increase in debt over a short period of time, is not at all surprising when we think about the incentives faced by state owned enterprises.

Because state owned enterprises are seen by bankers as government sponsored entities, they are in a position to engage in risky business and explore pipe dreams that private sector firms would only think about if a potential project could pass their “hurdle rate” or the rate of return on investment required to justify the opportunity cost of the firm’s capital.

The government held a press release once it became aware that Solid Energy was in financial strife, and did not rule out a bailout. With over 1,000 jobs at stake it is likely more taxpayer money will be spent even though $1.5 billion dollars has disappeared in value and therefore proceeds from state owned asset sales. That reduces the lower bound $5 billion dollar estimate to $3.5 billion dollars in a best case scenario.

It would be foolhardy to invest in any former state owned enterprise when surprises such as Solid Energy becoming worthless almost overnight can emerge. We do not know the power companies and all of the details of their fanciful overseas ventures. We do not know the details of their performance bonuses and accounting practices that could lead to a post-listing “oops”.

We are also in the dark with respect to what the Supreme Court judgment effectively greenlighted – compensation for the loss of rights in relation to water. When you add these variables in with the cost of paying investment bankers to handle the sale, potentially as much as $100 million dollars, we have no idea whether the grand plan of selling down state asset sales will achieve anything other than some vested interests benefiting from National government policy.

The Chairwoman of Genesis Energy, former Prime Minister Jenny Shipley, hasn’t been booted despite her involvement as a director of collapsed construction firm Mainzeal Property and Construction, owned by delisted NZX dog Richina Pacific. She said that she should be judged by her results for Genesis Energy but implying she had nothing to do with the collapse of Mainzeal. She hasn’t said anything about Mr Richard Yan, the controlling shareholder of the whole group.

The funny thing is, another Supreme Court judgment ruling that commercial building contractors could carry the can for leaky buildings led to the demise of Mainzeal as “last man standing”. When you add an alleged tendency to underbid on major contracts and an imported management structure of failed UK executives not used to operating in New Zealand conditions, it is hard to see why we should let her wash her hands of the Mainzeal collapse.

State owned enterprises haven’t had nearly as much scrutiny as comparable NZX listed firms like Contact Energy or Vector. We don’t know enough about them and don’t have enough of an open track record to make sure that investors aren’t being sold dogs. Do we really trust the National government to make sure that it doesn’t set up a situation where shareholders in partially privatised SOEs face a “Feltex Carpets” or “Air New Zealand” situation? It’s happened before. It could happen again.

Gods May Do What Cattle May Not

This post is entitled with a translation of the Latin phrase “Quod licet Iovi, non licet bovi”. It basically means that what is allowed for one group in society, is not necessarily allowed for the others. The Mainzeal receivership has upset many people because it is a clear indication of how New Zealand business actually functions as opposed to how many people wish it functioned. 

In this case, the “Gods” are the Mainzeal directors, executives and main shareholder. The cattle, sadly, are the employees, subcontractors and leaky building owners. There is a double standard where debts must be paid to the Gods, but the cattle are unsecured creditors and will have security guards and the Police sicced on them if they take active measures  to get paid!

Whenever a company goes into receivership or liquidation, there is much gnashing of teeth. Campbell Live shows an interview with a subbie owed hundreds of thousands of dollars, Bryan Gaynor writes a column that points out he was right 5 years ago and no one listened and Kathryn Ryan on Radio New Zealand has a chat to a subcontractor who cannot access his tools while the receivers tally things up.

The conceit in all of this media interest in the plight of the “cattle” is that it’s an issue they only care about when something newsworthy is associated with the clear display of where the balance of power lies in New Zealand. If you haven’t been playing along at home, you’ll realise that the power in New Zealand resides in the banks and everything is focused on returning as much money to them before anyone else save the receivers themselves sees a single cent of what they are owed.

One of the reasons why the construction sector is so prone to newsworthy tales of subbies losing everything is because it is one of the most unequal sectors of the economy. Enormous leverage is held by the big boys and there is a lot of activity that really should be more aggressively investigated by the Commerce Commission and Serious Fraud Office. But because this is New Zealand, under a National government, it would be very discomforting for home truths about how construction contracts work to be revealed in the midst of a multi billion dollar attempt to rebuild Christchurch.

What seems to have happened with Mainzeal is the main shareholder Richina Pacific propping it up with frequent cash injections – using it as a trading vehicle while making sure very little is available in the event of a receivership or liquidation. The avoidance of leaky building liability which would have been costing them millions could turn out to be the major reason behind operating in this fashion. A reputation for average work and poor project management was simply fuel on the fire.

This is not the first major company collapse, and it will obviously not be the last. Failure is not a bad thing for an economy in the long run. But in the short term there will be substantial losses for subcontractors – primarily tradesmen. How do they respond to substantial bad debt writedowns? Rationally. They will reduce employee numbers, reduce their debt, only bid for work with solid clients and deposits upfront, move towards labour-only contracts and even move to Australia where most of their former co-workers or employees have ended up.

I am not surprised that something like this has happened. The government lobbed a hospital pass at local councils and contractors with its miniscule contribution to the leaky homes crisis. The government replaced contractor’s liens with a pretty on paper but not very useful Construction Contracts Act. The government made sure insolvency law protects the banks while ignoring the de facto employment relationships between most main contractors and sub-contractors in the construction sector.

We need to realise that Christchurch will never be rebuilt. We need to realise that the new apprenticeships scheme is a decade late and an order of magnitude below the level of skilled workers needed to replace and maintain housing stock let alone actually rebuild Christchurch or large infrastructure projects.

The changes to the Construction Contracts Act recently introduced in the House are not sufficient to reduce the level of “taking the mickey” by main contractors around the country. I look forward to following how the “Gods” involved in this company collapse make out over the next few years. What will become of Richard Yan? What will become of the Mainzeal executive team? What will happen to Jenny Shipley & Co? How many cents on the dollar will unsecured creditors receive?

I think iPredict should start a contract, but I doubt there would be a market for anything about 10 cents in the dollar. The only I advice I can give to people who don’t understand how power works in New Zealand business is to stay out of the construction sector. You’ll be eaten alive by the sharks and then the banks will have their pick too.


Mainzeal In Receivership

New Zealand’s 3rd largest construction firm has been placed into receivership. Mainzeal is interesting because it is part of Richard Yan’s Richina Group.

Over at the NBR, the comments state the obvious : sub-contractors and employees will bear the brunt of the collapse. The secured creditors are likely to recover most of their loans and the executives at Mainzeal are unlikely to face any civil or criminal sanctions.

Putting aside the role poor management and leaky buildings played in the Mainzeal collapse, we should be concerned when large construction firms go under.

That’s because the construction sector is one of the best industries for creating flow-on work for low marginal product workers. The ~20% contraction of the construction sector since 2008 has been responsible for a whole world of hurt. It has driven a lot of skilled workers to Australia and others into insecure contract work on a project-by-project basis.

Another reason why we should be concerned with the way the construction sector operates is because it best represents the “contractor-sub contractor” model of doing business. Risk is transferred downwards while profits are concentrated amongst firms at the top of the pyramid with the most leverage.

Although Mainzeal didn’t have a major share of the market in Christchurch rebuild work, a lower number of firms operating in that market is clearly not good for homeowners.

I look forward to reading the receiver’s reports. How long until the construction sector gets the regulation it needs when it comes to payment of sub-contractors? The Construction Credit Contracts Act doesn’t help you when a company is placed into receivership.