Joe Hendren

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Sunday, February 20, 2005

Contact: No capital return for now, but the threat still remains

I was pleased to see that Contact Energy has informed the NZX sharemarket it has no plans to return capital to shareholders, but has instead allocated $130m for capital expenditure. See my previous posts on this issue, here and here.

But the threat of a capital return still remains. On the same day Contact's large shareholders, including its board, used their voting power to push through changes to corporate goverance at the annual meeting of the company. This will remove self-imposed restrictions on dividend payouts and capital returns to shareholders that previously formed part of the constitution. So while its good the corporate highwaymen demanding a capital return will not be getting anything soon, the changes to corporate goverance of Contact make it more likely this will happen in the future.

At the annual meeting Contact Energy's directors also came under fire for defending the donations of $90,000 the company makes to political parties on an annual basis, supposedly based on the number of seats they hold in the house. According to the NZ Herald, a majority of the about 150 shareholders at the meeting supported calls for future donations to be approved by investors. However, as the vote was based upon number of shares, it was lost, with only 11.62% of voting shares recorded in favour (88.38% against). This shows the extent by which the wishes of large shareholders dominate those of small shareholders within the company. As the right often idolise the business community, its no small wonder its usually the left who defend and extend democracy.

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Saturday, February 19, 2005

Dangers in the addition of an 'Investment Chapter' to CER

On Thursday this week the Minister of Finance Michael Cullen and his Australian counterpart announced “solid progress” towards the creation of the ‘Single Economic Market’ between Australia and New Zealand. “ Ministers also decided to investigate the possibility of adding an investment component to the Closer Economic Relations (CER) agreement.”

Thus the idea of an ‘investment agreement’ was floated again, with no analysis or explanation of what an ‘investment’ chapter of CER would entail. Perhaps Cullen gave nothing away because giving such an explanation would reveal an ‘investment chapter’ as a direct threat to democracy.

The benchmark for ‘investment agreements’ is the infamous ‘Chapter 11’ of the North American Free Trade Agreement (NAFTA). These provisions give multinational corporations the right to sue governments for compensation or reversal of laws/regulations that threaten their profits.

For example, the Canadian Government placed a ban on a toxic petrol additive, MMT on the grounds it caused nervous system damage and interfered with car emission control systems. In response, the producers of MMT, the Ethyl Corporation, used the provisions of the NAFTA to sue for $250 million, claiming lost Canadian profits and damages. Faced with lengthy court action, the Canadian Government was forced to revoke the ban in 1998, pay the company US$13 million damages and issue an apology. There are many other similar examples. As Bill Rosenberg (2001) has noted, even the threat of such proceedings acts as a break on a government acting in the interests of its citizens. Mary Lou Malig (July 2004) reports;
Canada had good reason to want to avoid a large damage reward. Since the implementation of NAFTA, the total amount of damages claimed by foreign investors has been a total of $US13 billion - $US1.8 billion from US taxpayers, $US249 million from Mexican taxpayers and $US11 billion from Canadian taxpayers"
These provisions are a direct threat to democracy, as they give foreign investors the right to challenge the mandate of governments to implement policies in the public interest; even in the case such policies formed part of a successful electoral platform.

A likely model for the CER investment agreement is the ‘Investment Promotion and Protection Agreement’ (HKIPPA) New Zealand signed with Hong Kong in 1995 (signed by National’s former Don, Don McKinnon that is). This agreement contains equivalent ‘expropriation’ clauses to those found in NAFTA, which aim to also cover Government actions that have an ‘effect equivalent’ to direct expropriation. In NAFTA this has been interpreted to include loss of an investment’s value through loss of profitability.

It also must be noted that the Government's new Overseas Investment Bill, currently before the house, allows the Government to further liberalise investment law by regulation (such as the threshold for business investments and the definitions of associated land). In the context of negotiations over the extension of CER or any other 'free trade' agreement this would allow the government to make further concessions largely free of parliamentary scrutiny (the RR committee is not sufficient!).

While at present it may seem unlikely that an Australian investor would make such a claim, it does beg the question why overseas investors are being given greater rights than local citizens or businesses. Consider the clearly signaled, high profile policy of the Labour party in 1999 to renationalise ACC. ‘Investment protection’ agreements could have affected or prevented the implementation of this policy following the election of the Labour/Alliance Government, especially if private insurance companies had a legal presence in Hong Kong. In this case, it was probably lucky the private ACC market had not been going for very long.

To give a contemporary example, any attempt to further regulate the privatised electricity market created by Max Bradford and embedded by Pete Hodgson could be met by a challenge by the new Australian owners of Contact Energy, who could claim that Government actions negatively affected the profitability of their ‘investment’.

Given the NAFTA experience of Canada and Mexico, perhaps such challenges are not so unlikely after all. Any proposals to include NAFTA or HKIPPA like clauses in CER, or any other ‘free trade’ agreement, should be steadfastly exposed and opposed. Such provisions are a direct threat to democracy as they could prevent our Government from implementing policies given a democratic mandate by the New Zealand people. And that, at the end of the day, is what democracy is all about.

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Saturday, February 12, 2005

More on Contact: Pocket the cash, put up power prices - Sue Newberry's analysis

Last month I wrote about the prospect of investors taking a 'capital return' out of Contact Energy and the likelihood this will lead to higher power prices. On Friday an article by Sue Newberry in the Christchurch Press reached the same conclusion (unfortunately I was unable to find an online version). Sue is a senior lecturer in financial accounting at Canterbury University.

Newberry also reports Contact plan to push through changes to corporate governance at a meeting scheduled for February 15, to remove its self-imposed restrictions on dividend payouts and capital returns to shareholders. Contact could then make a massive payout to shareholders, perhaps as large as $1.15 billion, which will be financed by the company taking on more debt.

Newberry says "Electricity Consumers should think of this massive payout as coming directly out of their own pockets. Part of this payout will have come from money already accumulated within Contact as a result of the high electricity prices domestic consumers already pay; the rest will come from increased electricity prices yet to be imposed."

To Newberry, this highlights a key problem with the current electricity pricing regime. Electricity companies are allowed to earn profits which represent an acceptable percentage return on assets. When a company revalues its assets upwards, just as Contact made a massive upwards revaluation last year, the dollar amount required to earn an acceptable percentage return rises immediately - electricity prices must rise as a result. The asset revaluation also leads to an increased depreciation costs. Electricity prices have to rise again to cover that as well.

On the back of speculation about a capital return to shareholders, Contact's share price jumped over the $7 mark to close yesterday at $7.02 (today's Press, p. C6). Good for investors, but not necessarily good for consumers. The Press also reports big industry is complaining about electricity prices as high as $1.34 a kilowatt hour in the North Island. So a privatised electricity system is kicking the private sector too. That said, the complaints of Comalco New Zealand need to be taken with a grain of salt, especially their disappointment in having to reduce power use by 5% to avoid the daily spot market. The overseas owned company running the Bluff aluminum smelter gains most of its power at far below market rates, thanks to a deal made with the Government in the 1960s to convince Comalco to set up the smelter. The details of this agreement remain secret to this day, but Muldoon did confirm in Parliament in 1968 that this deal included significant tax breaks as well.

If there is a "power crisis" this winter, higher prices will be to the benefit of Contact's Australian owners and other investors, who will be comfortable with their capital return and dividends from the company. But they have no chance of being cold as a result (but I guess NZ shareholders could complain about power prices at a shareholders meeting!)

If there is a "power crisis" this winter, while we are all being told to turn off all unnecessary power, perhaps we should consider closing down the Bluff smelter - if we are serious about electricity savings and guaranteeing supply to essential services. Closing one smelter would release around 15% of NZ total generating capacity.

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Monday, February 07, 2005

Iran and nuclear weapons

With a tip of the hat to Empire Notes, I found an interesting article on Middle East Report Online that includes very relevant background to the current ‘Iranian nukes’ debate.

In going to war with Iraq, Joost R. Hiltermann says the Bush administration sought to prove that Clinton’s policy of dual containment – a decade of sanctions, threats, military action, and UN-led disarmament had failed to stop Iraq from developing WMD. But Iraq, it turned out, had no WMD in March 2003, and probably did not have any for most of the preceding decade. Hiltermann points out “Iraq, of course, was not the only target of dual containment. So was neighbouring Iran, which likewise was suspected of having secret programs for building weapons of mass destruction and was seen as a destabilizing force hostile to US interests.” As the Bush Administration failed to find their proof of the failure of dual containment in Iraq, will they force a similar method of ’proof’ onto neighbouring Iran?

According to Hilterman, Iran sued for peace from the Iran/Iraq war at the end of the 1980s because Iraq’s escalating use of chemical weapons made Iranian “human wave” assaults ineffective. Human wave assaults are barbaric, but using chemical weapons against them is one step worse. Following Iraq use of chemical weapons in 1983 Iran asked the international community for assistance.
"Tehran’s repeated remonstrations with the United Nations fell virtually on deaf ears. For six years, Iranian diplomats wrought ever more sophisticated legal arguments to persuade the UN that it should have an institutional interest in upholding the relevant precepts of international humanitarian law. In particular, the 1925 Geneva Protocol, which prohibits “the use in war of asphyxiating, poisonous or other gases, and of all analogous liquids, materials or devices,” was directly on point. The UN’s failure to uphold such precepts, the Iranians said, would undermine its credibility and impartiality, while giving rise to a regional arms race.”
Washington also conducted a disinformation campaign that sought to equally blame Iran and Iraq for the use of chemical weapons, a campaign that helpfully took the pressure off Iraq, then a US ally. Faced with journalists asking questions about Iraq’s use of chemical weapons the US slapped on a ban on the export of chemical precursors to both Iran and Iraq in the spring of 1984, despite internal documents showing US officials had been aware of Iraq’s conduct for at least six months.
“It is generally accepted that toward the end of the war Iran had gained the capability to field its own chemical weapons. Parliamentary speaker (and future president) Ali Akbar Hashemi Rafsanjani declared two months after war’s end that “chemical bombs and biological weapons are poor man’s atomic bombs and can easily be produced. We should at least consider them for our defense…. Although the use of such weapons is inhuman, the war taught us that international laws are only drops of ink on paper.”
Hilterman concludes
“[T]he world’s ability to challenge Iran on any programs it may have today is reduced dramatically by the Iranian perception that it has nothing to protect it from WMD in the hands of a regional power, such as Israel, but its own WMD deterrent. The current standoff over Iran’s alleged nuclear weapons program is a graphic illustration of the problem.”
In any discussion of the proliferation of nuclear weapons in the Middle East, the significance of the country starting ‘I’ should be obvious. As the only country with nuclear weapons in the region, the lack of ‘mutually assured destruction’ (MAD) is just plain dangerous, as it can only encourage a regional arms race, as countries like Iran fear that Israel could use nuclear weapons without the disincentive implicit in MAD. Remove the fear of a nuclear cloud from Iran and any moral rationale (if there is any) to develop its own weapons would disappear. This is likely to be the key reason why Iran refuses to permanently suspend its (low-level) uranium enrichment program, even though such processing is not prohibited under the Nuclear Non-Proliferation Treaty (NPT).

Iran is a signatory to the NPT, making it subject to the International Atomic Energy Agency (IAEA) while Israel remains as a rogue state outside of the NPT. Even if it is shown that Iran is disregarding the crucial tenants of the NPT, this does demonstrate the advantage of potentially nuclear capable countries being inside the NPT tent. Of course, signatories with nuclear weapons disregard crucial tenants of the NPT by making no moves to disarm, but that’s another story.

US attempts to dissuade Iran from developing nuclear weapons would have far more force and credibility if they applied the same standards to Israel. In the case of the Middle East it was ‘I’ who cast the first stone. If calls for Iran to stop developing nuclear weapons were combined with a genuine call for a nuclear free Middle East and an unequivocal call on Israel to disarm, the US message would have far more moral force and credibility. Otherwise, it just looks like more US hypocrisy.

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Tuesday, February 01, 2005

The herald poll is a fruitcake

Today the Herald released the final results of its final poll. My phone rang last week, making me one of the 800 people they polled.

To my dismay, the Herald released early results of its poll, based on 302 of 800 respondents, despite this being highly likely to affect the results. This also surprised DPF and Left and Lefter.

Seems to me the Herald is more interested in creating polls to sell newspapers, than accurately reporting public opinion. If it was an attempt to drum up more column inches out of Brash's speech, or even tacitly support his proposals, the attempt appears to have failed, even though they asked some mightily leading questions.

When asked which party I would vote for if an election was held tomorrow I said "Alliance". In any case, as a political geek with an interest in polls, I knew that showing my support for a small party would show up more about the poll than supporting a major party (not that I would in any case).

I was then asked if I knew the subject of Don Brash's latest speech. I immediately clarified whether they were asking me whether I knew the subject of Brash's speech or whether I agreed with his proposals. They were asking me what his speech was about. Considering the questions that followed, I thought this question was more than a little leading.

I was then asked whether I thought welfare was the most important "problem" facing New Zealand, one of the important "problems"...or not an issue. Describing welfare as a "problem" is leading also. I said it was one of the important problems, but for entirely different reason to Brash - I think many benefits are too low. While the question is open to different interpretations I knew this was unlikely to be represented in any reporting of the poll. When I was asked what issue did I think was the most important I replied "Student loans" - surely it would have been better practice to ask this question BEFORE mentioning Brash?

I was then asked about whether I supported some specific ideas in the speech. I was disappointed not to be offered a scale. I replied 'strongly opposed' to these three questions just to make sure! Interestingly, the Herald did not appear to print the final results of these questions today, based on what I could find in the online version, even though the Herald reported the following on the 29th, based on meaningless partial results.
But some specific policy ideas found little favour, particularly his view that adopting out babies should be a more acceptable option than it is now. A majority of 74.5 per cent disagreed, while 15.7 per cent agreed.

The opposition to his policy of stopping women on the DPB getting any extra money if they became pregnant while on the benefit was 44.1 per cent. However, 46.9 per cent agreed with him.

Dr Brash said he would make it harder to get the sickness benefit - a view supported by 56.6 per cent and opposed by 33.6 per cent.
I wonder what the full results said? Given the final results of the poll showed greater support for the left, I would expect the percentages supporting Brash's policies to fall. One wonders what results would have ensured if they had asked relevant, but different questions. "Do you support refusing extra help to families with newborn babies on account of the family gaining its primary income from the DPB?"

I never regarded Brash's advocacy of encouraging adoption to be a serious proposal, as I believe this is far more likely to be a sop to anti-abortion National supporters who regard Brash's socially liberal instincts with suspicion. But they need not worry, as Brash is likely to flip flop further, based on this voting record on the Civil Union Bill.

I would be very keen to get my hands on the full statistical breakdown of this poll, as I would like to have a closer look at the questions and the order of questions. ATM I am relying on memory and a few notes I scribbed while I was on the phone. Does anyone know of a link of the web where I might be able to access this?

Left and Lefter
suggests an alternative poll based on google results. I wonder why Labourities Just Left and NZ Political Comments fail to list the Alliance in their reports of the poll, but include the Progressives. The Alliance (0.6%) got three times as much support as the Progs!(0.2%) - grin! - :)

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