The phones are running hot this morning as punters pre-register for
their copy of the Snowy Hydro float, but we’re still yet to see the
structure of the offer or the company’s profit forecasts and balance
sheet.

However, it is clear that the sale proceeds will probably not arrive
before the end of the financial year so NSW Premier Morris Iemma won’t
achieve his goal of declaring a cash budget surplus for 2005-06
financial year to hide the incompetence of Bob Carr’s fiscal record.

That is, unless Iemma and his advisers do something which is eminently
sensible given Australia’s constitutional tax arrangements and
investment banking fee structures.

Snowy Hydro should be gearing its balance sheet up by paying a special
dividend of up to $1 billion to its three government shareholders
before the float. For all we know, they could already have done this,
which might explain why the rhetoric is shifting back to a “$2.5
billion float”.

The rationale behind such as move is that a privatised Snowy will have
to pay full federal tax at the 30% company rate, whereas at the moment
it can deliver tax-free dividends to the Victorian and NSW governments,
which together own 87%.

The tax holiday for state-owned enterprises actually creates a strong
incentive not to privatise. For instance, the Victorian Government could
have creamed off 100% of all those Tabcorp profits if they’d kept the
business in public hands. Instead, Jeff Kennett floated it in 1994 for
just $675 million without any debt and the Federal Government has so
far collected a windfall $1 billion in extra company tax revenue, plus
all the dividend tax earnings and capital gains tax that have flowed
from a $2.25 share zooming up to $15.64.

For this reason, it would have made more sense to take $400 million of
the proceeds by way of debt and then float the business for about
$300 million. Taken to its logical extension, Snowy Hydro should be
loaded up with as much debt as the market will bear to minimise the
future tax revenue for Canberra.

This would work well at another level because corporate advisers tend
to get paid based on the equity proceeds of a float. The Federal Budget
revealed that Macquarie Bank (well done Bob Carr), UBS and Goldman
Sachs JB Were will be sharing in $110 million from the float. They
would struggle to justify such huge fees if Snowy carried $2 billion in
debt and the equity raising was only worth $1 billion.

However, have you ever met an adviser who advised a structure that
reduced their fees? All this needs to be considered when we finally get
to see the prospectus in the next couple of weeks.

The advisers clearly didn’t win the argument on the poison pill and 10%
shareholder cap because this politically driven xenophobia will clearly
reduce the proceeds for taxpayers because no takeover premium will be
built into the price. Silly stuff. The Jeff Kennett model of selling to
the highest bidder from anywhere in the world should have been adopted
here.

Then again, we’re talking about the NSW Government which managed to
sell the NSW State Bank for a net $300 million when it is today worth
about $3 billion. The reason then Colonial finance director Paul
Batchelor claimed he’d pulled off “the greatest bank heist in history”
was that John Fahey put all these ridiculous restrictions on who could
bid. Only politicians could come up with rules that see less cash
returned to taxpayers from a public asset.