Saturday, May 21, 2005

SOE Asset Sales Mk II

This is interesting. There have been a few articles appear in the press over the past month or two about a deal that some State Owned Enterprises have completed cross-border leasing deals to 'minimise' their tax, and provide cash injections for shareholders. The result of this is that the SOE's involved have been receiving cash injections of around $30-35 million dollars, transferred control of the asset to a company registed in a tax haven, and reduced the tax that they have to pay the New Zealand Government - which in return will increase the tax burden on other taxpayers.

Transpower completed its deal in December 2003 to sell the South Island grid to a US investor that is now leasing the grid back to Transpower through a company registered in the Cayman Islands - conveniently a tax haven. This has saved them around $35 million - I wonder if this was returned to the shareholder - Dr Michael Cullen - leaving Transpower asset and cash poor?

Transpower spokesman Wayne Eagleson spoketh

"They are in our view sensible business decisions which allow us to use our assets to generate additional revenue for our shareholder."

Note that they refer to their singular shareholder? I wonder who that might be.

These are known as Sale-In/Lease-Out (SILO) agreements, and appear to have the blessing of the Inland Revenue Department. However, these schemes have recently come under review in the United States, and a clamp-down is occuring on them as they were associated to the collapse of Enron.

Mr Eagleson said the 2003 cross border lease arrangement had been disclosed in Transpower's financial reports and all material details of the transaction were disclosed to the Inland Revenue Department and ruled on where necessary.

And some University of Canterbury accounting lecturers have been researching these deals recently.

But cross-border leasing has been criticised by Canterbury University accounting academics Alan Robb and Sue Newberry, who said it was shonky and, in the case of the Transpower deal, had put ownership of the grid at risk. Dr Newberry said the concept - called "lease-in, lease-out" in the US - had been subject to a big tax inquiry in that country and the authorities were now shutting such schemes down.

In addition to Transpower, it appears that Airways Corporation has done the same to a tidy tune of $29.5 million.

Here are some choice quotes to whet your appetite on this issue. It is definitely one that should have further investigation by various political parties.

In the US, such deals have been slated as tax scams and have cost hundreds of billions of dollars in lost tax revenue. Special purpose entities were closely linked with the fall of giant US energy trading company Enron.

I'll believe this quote when I see it: -

Transpower spokesman Chris Roberts said "This allows Transpower to reduce our borrowing needs and ultimately charge lower prices to our customers."

Given some of the issues over the past 15 years revolving around management of New Zealands energy needs - hydro crises in the early 1990's and the naughties, the Vector (nee Mercury Energy) cable problems in Auckland in 1998 - it is incomprehensible that at a time we should be maintaining control over our critical infrastructure, that we are in fact selling it off to international interests so that we can lease it back to make the balance sheets more agreeable to The Shareholder - Dr Michael Cullen.

I would be very interested to hear more on this issue. Is it a storm in a teacup, or is it something we need to be concerned about?


Blogger Antarctic Lemur said...

Dodgy Cullen. Why risk so much for so little gain? I don't understand.

Also - you can get comments to show in a popup window in Blogger's Settings->Comments.

5/21/2005 05:07:00 PM  
Blogger Bernard Woolley said...

I can't figure out why either? The return vs risk doesn't appear to an external observer as being favourable. Thx for the tip on the Comments, duely updated, and also enabled anonymous comments.

5/21/2005 05:19:00 PM  
Blogger Antarctic Lemur said...

I held off linking until now - too few readers in the weekend. Also got you on NZ Pundits tag board.

5/24/2005 03:49:00 PM  
Blogger noizy said...

Forgive my ignorance, but how can Cullen be held responsible for an SOE's business practices?

I'd have thought the Management, the Board, or even the Minister of SOEs should be lined up as responsible bodies before the Minister of Finance.

Any explanation welcome.

5/24/2005 04:12:00 PM  
Blogger Bernard Woolley said...

Hi James. The NZ Government is the sole shareholder in Transpower. Transpower is acting to generate a return for its only shareholder, the New Zealand Government. The Government has been known for expecting return on investment as any shareholder should. My concern is that a Cullen-lead drive for shareholder return across multiple SOE's has forced Transpower, AirWays Corp and maybe others to undertake these risky deals in an effort to provide the Labour Government with more immediate cash. I seem to recall reading an article about the Labour Government milking TVNZ as a cash cow as well. Sure, Cullen isn't the only one to blame, but when your boss says jump...

I should also point out that this could reflect poorly on National as well, given that this goes back as far as the mid/late 90's.

Regards Bernard

5/24/2005 04:24:00 PM  
Blogger noizy said...

thanks Bernard.

5/24/2005 04:26:00 PM  

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