10. Hon TREVOR MALLARD (Labour—Hutt South) Link to this
to the Minister of Finance
What are the risks to the Crown in holding State-owned enterprise shares that he was referring to when he gave evidence to the Finance and Expenditure Committee in February 2011?
Hon BILL ENGLISH (Minister of Finance) Link to this
I recall raising the issue of risks in the context of a discussion about the Government bond rate and the return on State-owned enterprises. The Crown faces the same range of risks as any owner of any commercial company: the need to change prices; fluctuating demand for their product; changes in costs, such as the changes in the oil price at the moment; changes in the exchange rate; competing against better technology; and changes in the supply and demand of the products they buy and the products they sell. They are all risks of owning a commercial company.
Hon Trevor Mallard Link to this
When he referred to the risk both then and today, does he regard the risk profile of the assets as positive or negative?
It is not a matter of whether it is positive or negative; it is whether it is, in a technical sense, properly priced. The benchmark is what the Government borrows money at, which is 6 percent. When we own companies we expect to make a return of higher than 6 percent to reflect the fact that there are more risks in running a company than in lending to the Government.
Hon Trevor Mallard Link to this
Does he therefore think an average 17.5 percent total return over the last 5 years is a reasonable return for this type of asset?
I will make a couple of comments about that. The first is that those returns are based, in some of those years, on dubious valuation methods. Secondly, if the returns were actually 17 percent, based on sound commercial valuations those returns would look excessive. But the previous Government allowing electricity prices to rise by over 70 percent in 8 years might explain why they made such big returns.
Hon Trevor Mallard Link to this
Pursuant to that supplementary answer, is it therefore his view that the energy company assets are overvalued in the Crown accounts?