National loves strategic assets too!

I read with great surprise this morning that the new National government has blocked the sale of the Taharoa iron sands to CKI (who now own the Wellington electricity network too).

Matt was equally surprised, he sent me an email with the subject as “WTF” and the body simply containing the link:)

What the hell is going on? It’s already owned by Australians and pretty much all of the iron ore it produces is exported.  I’m not sure that selling sand falls within the bounds of something that we consider strategic? Maybe that’s just me though

As you probably worked out from my previous rants I disagreed with the decision to block AIAL (here and here) and found it inconsistent with the decision to allow the sale of vector’s electricity network (here). I can’t really work out a consistent pattern for when asset sales will be blocked so I can only imagine what foreign investors are thinking…

If we won’t let people buy our sand from the Aussies what will we let them buy?

Rant over.

  • Thanks for the post Agnitio.

    This particular act to block the sale of an asset is much more concerning than the AIA case. Whereas the motivations of the previous government were pretty easy to understand (and disagree with if you are not of the same bent), the line of reasoning here is much harder to pick.

    First, the AIA stake was owned by a NZ owned firm and the contract for sale was to a Canadian firm. If one favours NZ ownership of ‘strategic assets’ this fits well. More complexly, the previous government had been jawboning about AIA fees for some time, which had the effect of keeping charges somewhat lower due to the implicit threat of regulation (AIA really were extracting super profits). By allowing a sale at the kind of price that had been agreed the government would have been implicitly endorsing this valuation. To then regulate would have sent very bad signals to overseas investors. In a sense, the government, by blocking the deal, was able to retain its ability to regulate this strategic monopoly in the future.

    Compare this to the current situation. The firm is not a monopoly, not essential infrastructure, and the product is open to international competition. Both the buyer and the seller are international firms, and neither should be particularly favoured as purchaser. However by blocking the contract the purchaser benefits, since following the agreement international steel prices have fallen substantially and it is clear that Cheung Kong Infrastructure would be paying too much. Not surprisingly, Bluescope (the intended seller) is looking at legal options, whereas Cheung Kong is happy enough with the government’s actions. Compare this to the AIA case where the buyer was most displeased.

    So why would the government do this? The OIO says that the current international economic situation has made it no longer viable for Cheung Kong Investments (CKI) to expand the business as previously planned when making the bid, and thus it is no longer in the national interest. This is baloney because the same incentive changes due to the international economic situation also apply to Bluescope as owner.

    I do note that the government had previously allowed CKI to purchase the Wellington electricity netwrok from (New Zealand owned) company Vector for $785 million – a strategic asset by any measure. Presumably their plans to invest stacks of money in a range of infrastructure investments made them a ‘good’ fit for the government. With the new governments plans to invest a hang of a lot more in infrastructure, keeping on good terms with CKI is probably something that they want. Allowing them a way out of this now loss-making acquisition ex post signing the contract is likely to do this. Perhaps CKI even threatened to pull some of that investment capital if they didn’t get their way. I know that National is ideologically driven to look everywhere and anywhere for sources of infrastructure capital (a publicly known example is the 40% requirement for the NZ Super Fund to be invested domestically – outrageous!) and CKI with tens of billions of dollars is probably a firm that they want to get sweet with (or may already be).

    The whole thing stinks to high hell.

    Okay, enough stirring from me.

  • Gareth

    The only reason I can think of for these “no dirty foreigners selling to other dirty foreigners” decisions (and given AIA was 40% owned by offshore hedge funds that were very keen to sell into the deal it had a similar flavour in part to it) is that it eventually may lead to purchase by a NZ firm. It’s longterm private nationalisation by shaping the market in one way only.

  • Hmmm… Interesting point Gareth. In this particular case I can’t see it myself, since I don’t think that this particular flavour of government is anti foreign ownership (I don’t think that the old one was either though), but who knows – I think that whatever the reason, it is likely to be quite fishy!

    The explanation from the government is one I look forward to. My pick is that if it is done for straightforward (non-fishy) plain old ideological reasons, the relevant minister will announce it. If it is mired in vested interests etc then “that nice man Mr Key” will announce it.

  • ‘An embarrassing moment’ might have been a better title for this post. 😛

  • I am quite surprised that this hasn’t really been covered in the media apart from reporting the facts. Politicians have not been asked to justify what happened let alone give an explanation. I’m still unsure why the decision was taken. Why is this not newsworthy when the AIA affair (which we pretty much all knew why Labour was doing it) was?