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Friday, July 25, 2008

The elephant in the room


Commerce Minister Lianne Dalziel announced her high powered taskforce to investigate “deepening and broadening” the country’s capital markets on Monday. But there was an elephant in the room nobody wanted to mention. (It was quiet and orderly, after all, and not making anywhere near the racket going on outside, which sounded like a stampede of bauble-covered racehorses chasing down Winston Peters.) That elephant was the possible sale of state owned enterprises.

The grandly named – and eminently qualified – Capital Market Development Taskforce is charged with looking at regulatory impediments, savings issues, and anything else material to the problem of New Zealand’s rather emaciated equity and bond markets. That will almost certainly mean examining the possibility – and desirability – of bringing state-owned enterprises into the public New Zealand equity and debt markets.

This of course is a guess. But it is a guess based on the membership of the aforementioned eminently qualified panel, which contains many of the most eloquent advocates of (at least) partial privatisation of SOEs as stock opportunities for “mum and dad” investors.

Chairman Rob Cameron was an architect of the SOE model in Treasury in the 1980s, and in 2006 produced a paper recommending (among other things) partial floats of those companies still in state ownership. NZX chief executive Mark Weldon has also publicly argued for listings of Crown companies. Rob McLeod is a former chairman of the Business Roundtable and Fletcher Construction’s Jonathan Ling is a current member of the small-government lobby group.

Earlier in the year the government declared it would make asset sales a “defining” feature of the election, with the same kind of conviction that Winston Churchill announced his policies around the issues of beaches, landing fields and streets. No matter that “asset sales” was itself a phrase so poorly defined that the government included under its umbrella privately owned airport share transactions, possible partial share floats for SOEs, and public-private partnerships. But the government’s efforts to lump together so many different issues as one homogenous mass are awkward given the sharp delineation it tries to maintain between National’s tentative policy positions on SOE sales and its own.

That’s because differences between the policies the parties have publicly promoted – in the case of Labour and National, gingerly – are fairly insubstantial. But quietly Labour has adopted a harder line against private sector involvement. Officially, the government encourages SOEs to expand their businesses into adjacent areas, and develop subsidiaries that may be eventually sold off or floated on the stock market. It’s part of the “economic transformation” agenda.

State-owned Enterprises Minister Trevor Mallard confirmed on TV One’s Agenda last month this was still official policy. But he said that was in contrast with National – while Labour would allow, say, a float for Meridian Energy’s Whisper Gen company, the National Party would “sell off [Meridian’s] windfarms.” Labour’s position, as stated by Mallard, therefore also contrasts with his own launch of the policy in August 2006 where he said that “this could extend to the sell-down or sell-off of discrete new investments by SOEs, for example a new wind farm or new technology company.”

In other words, a new wind farm could be sold down to the public but not an existing one. The difference is obscure, and probably irrelevant to investors (not to mention power consumers, so far as the “national interest” in state ownership is concerned). National, for its part, hasn’t discussed selling particular (for example) windfarms, but was considering sell-offs of say 25% of a company onto the NZX. Those plans have been abandoned though.

Another option the party is believed to have investigated would be to sell non-voting shares, or to sell bonds from SOEs to retail investors to finance investment (say, in new wind farms). The government’s so-called “long-term hold” strategy for state-owned enterprises has been shrouded in secrecy since its launch in 2004. The plan is to move toward “more appropriate capital structures” for SOEs given the government’s strategy, a fairly question begging exercise about what that strategy will be.

As far as the government will reveal, the strategy is essentially the opposite of having SOEs more involved in capital markets. It’s more of a move back to being departments of the government, with dividends flowing back to the Crown and ministers handing back cash for new investment and expansion like pocket money to the grateful petitioning boards. It also probably means plans to take on increased debt – one of the sure ways to get a company like New Zealand Post, with an AA- credit rating, down to the government’s inexplicable target of BBB.

So when investment decisions are taken, it will entail negotiating more with government (the shareholding ministers) to get approval for an increased capital injection. That binds the SOEs more tightly to the government. Moreover, it also signals clues as to where the government may look for its pre-election spending spree, given that Finance Minister Michael Cullen boasts of having almost “cleaned out the cupboard.”

The Treasury’s notes to the budget state dryly:

“One possible outcome of these reviews is that some capital could be returned to the Crown. This may be in the form of a special dividend, which would decrease gross debt.”

Of course, the government has signaled it has no real objections to the level of gross debt it’s carrying (around 20% of GDP), which means no qualms about sending any dividends to the consolidated fund for spending. Some SOE dividends could be tagged to specific expenditure – such as Meridian funding a low income electricity user rebate, should the emissions trading scheme pass.

That’s not so much selling the family silver to pay off debt – it’s more like packing the kids off to work and sending their brother to university with the money. But it does signal a cleanout of SOEs that is at variance with any plans to get them involved in the capital markets.

National, of course, has committed to not selling any of the state’s companies in its first term. If it ends up in government, it may face the same searching questions about what to do for capital markets that Labour would, but would also face much greater internal temptation when its natural allies – appointed by a Labour government – come back and tell it what it wants to hear.

That’s assuming the government hasn’t cleaned out that cupboard as well by November.

2 Comments:

At 27/7/08 1:35 pm, Anonymous Anonymous said...

Quick correction - Rob McLeod is still the chairman of the Business Roundtable.

That is all. Carry on!

 
At 28/7/08 2:56 pm, Anonymous Chris said...

Awesome column Ben, you make the actors involved in policy sound incredibly confused about how to achieve the mixed economy, and how their values should actually translate into structure. Is that accurate?

BBB - what an awesome ambition for a developed nation - just above junk bond status!

 

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