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The Government's asset sales plan - FAQ

Wednesday 7 Mar 2012 2:01 p.m.

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By Dan Satherley

The big issue of last year's election, asset sales, is set to continue to dominate the political arena in 2012.

The Government has indicated the first of the assets on the block, Mighty River Power, will be up for partial sale later this year.

3 News has prepared this FAQ to help you understand why the Government is doing it, and why there is such strong debate around the matter.

What is a state-owned enterprise?

A state-owned enterprise, or SOE, is a company owned by the Crown (the Government), but operated as a commercial business and subject to the Companies Act, according to the Treasury.

Their services and products are priced according to the market, and they pay dividends on any profits to the Government.

SOEs came into being with the passing of the State-Owned Enterprises Act of 1986. They differ from Crown entities like TVNZ and ACC in that they usually have an unambiguous commercial focus, whilst Crown entities "generally are owned to further other policy objectives and the profit objective may be secondary", according to the State Services Commission.

Which SOEs is the Government proposing to sell?

Electricity companies Mighty River Power, Meridian Energy and Genesis Energy, coal company Solid Energy, and the Government’s existing shares in Air New Zealand are all in line for partial sale.

Prime Minister John Key said last year no other SOEs were being considered.

Mighty River Power will be the first one sold, expected to go on the block in the third quarter this year.

Why is the Government proposing to sell them off?

The primary reasons for the partial sales are to reduce the amount of borrowing the Government has to make in order to balance the books, speed up the country's return to surplus and to build new infrastructure such as schools, hospital redevelopments and transport projects.

Early in 2011 Mr Key and Finance Minister Bill English were suggesting the partial sale of the assets mentioned above could reap between $7 billion and $10 billion. But in February this year, the Government's estimate had been reduced to $6 billion, Mr English admitting that was "just a guess".

Before becoming leader of the National Party, Mr Key said it didn't make much sense for the Government to own three of the country's four major electricity companies (the fourth being privately-owned Contact Energy).

The three companies – Genesis, Meridian and Mercury were created in 1999 when the previous National Government split the Electricity Corporation of New Zealand. The idea was that competition would force each of the companies to operate with greater efficiency, keeping costs and prices down, even though all three were still wholly-owned by the Crown.

What is the mixed-ownership model?

Wary of the public's distaste for selling off assets wholesale (see below), the Government is instead only going to offer up 49 percent of each company on the stockmarket, retaining a 51 percent controlling share. 

Private shareholders will be barred from owning more than 10 percent of the voting rights in any one asset.

There will be a degree of transparency in decisions made by the Government concerning SEOs partially sold off, as ministerial decisions will remain subject to the Official Information Act – but the companies themselves will be excluded, like Air New Zealand is now.

"The mixed-ownership companies operate in a competitive environment, and, once listed, will have comprehensive continuous disclosure requirements under stock exchange rules," says Finance Minister Bill English.

"Customers have contractual and consumer law remedies available to them, as well as the ability to take their business to a competitor – the same rules applying to their private sector competitors."

Companies sold under the new Public Finance Act will no longer have to abide by corporate responsibility objectives in the State-Owned Enterprises Act, and instead will be expected to build consumer trust like any other company.

State-Owned Enterprises Minister Tony Ryall says in all, under this plan only 3 percent of the Government's total asset base will be sold.

Air NZIsn't this how Air New Zealand successfully operates?

Air New Zealand is indeed already operating under such a model. It was largely privatised in the late 1980s, but in 2001 the Labour Government bought back around three-quarters of the company when it fell into financial strife.

Mr Key has repeatedly held up Air NZ as an example of how the mixed-ownership model works.

What opposition is there to the sales?

Despite the Government retaining a controlling share in the companies floated, the public is generally uncomfortable with the plan.

A 3 News poll in February this year showed 62 percent of voters oppose the sales, and only 35 percent were in favour.

This is despite National comfortably defeating Labour in last year's general election, which Labour's then-leader Phil Goff suggested was a referendum on the Government's plans.

Early in 2011, 60 percent opposed the plan, showing that despite a convincing win at the election, the Government has struggled to get voters onside.

Other parties have also sided against the Government, including the Green Party, Mana and New Zealand First.

Last year United Future's only MP Peter Dunne campaigned against selling certain assets – Radio NZ, Kiwibank and the country's water supplies – but backed selling the power companies.

It was a condition of his deal to back National that asset sales legislation would keep at least 51 percent of each company in the hands of the Crown, and place 10 percent limit of individual private ownership.

Labour and the Greens say the partial sales will actually cost New Zealand in the long run, arguing that the loss of dividends will outweigh savings made by reducing debt.

"Treasury's annual portfolio report shows SOEs returned record dividends for the past five years while total shareholder returns averaged 14.5 per cent," Greens co-leader Dr Russel Norman said in December last year.

Labour, Greens and lobby group Grey Power have launched a petition calling for a citizens-initiated referendum on asset sales. They will need to collect more than 300,000 signatures in 12 months in order to force one, though it won't be binding.

Didn't we already try this with Telecom?

Many Kiwis are wary of asset sales due to their experience with Telecom, which was corporatised in the late 1980s and sold to US-based Bell Atlantic and Ameritech in 1990. Over the next couple of decades, the company was highly criticised for high pricing, monopolistic practises, excessive executive salaries and poor investment in broadband services.

In the last five or six years, the Government has forced Telecom to unbundle the local loop, lower mobile termination charges and open its network to competitors.

The difference with Telecom is that it was sold off in full – for now, the Government is only proposing partial privatisation.

But regardless, many Kiwis fear that the shares will end up in foreign hands, sending money that would previously been going to the Government or local investors, overseas.

Dr Norman last year said that within six years of being sold, Telecom's dividend payouts had tripled.

"The taxpayer basically funded the construction of a state-of-the-art telephone network and then foreign-owned companies reaped all the profits from that public investment," said Dr Norman.

Will the Treaty of Waitangi still be relevant?

National's coalition partner the Maori Party was under great pressure to vote against the changes, coming close to walking out on the Government altogether. The sticking point was the Government's plan to remove references to the Treaty of Waitangi from the legislation.

The Maori Party eventually backed the legislation when National agreed to keep reference to the treaty, with the clause that it only referred to the Crown, and no other shareholders.

Won't Labour just buy them back when they get back into power?

Possibly. The previous Labour Government under Helen Clark had a record of buying back previously-sold assets, including New Zealand Rail Limited (also known as Tranz Rail and Toll Rail, renamed Kiwirail) and Air New Zealand (see above).

Ms Clark's term also saw the establishment of Kiwibank, the first time the Crown had operated a banking service in New Zealand since selling PostBank in 1989.

In contrast, in 2002 the Government voted to sell 22.5 percent of Air NZ to Qantas, but the sale was stopped by the Commerce Commission.

The Fourth Labour Government, under Finance Minister Roger Douglas, sold several state assets, including Telecom, Air New Zealand and PostBank.

Labour's finance spokesperson David Cunliffe says Labour would "look very hard at buying them back", should the Government's asset sales plans go through.

How can I invest?

As a New Zealander, you already own a share of each state-owned enterprise through the Crown. By selling 49 percent of a company's shares, the Government is essentially halving your stake, unless you make up for it by purchasing some shares of your own.

The Government has made it clear it would like most of the sold-off shares to end up in the hands of Kiwi "mums and dads", but has yet to clarify how this will actually happen.

"They’re my number one priority, and we will make sure that we will be setting that at a level where it’s affordable for a lot of New Zealanders," Mr Key told reporters in March.

He also said that New Zealanders may get a chance to purchase shares before they were offered to foreign investors.

Financial news website interest.co.nz reported that "a 2010 Treasury paper to Cabinet recommended that, even though the Government would prefer to sell shares to New Zealand investors, potential overseas investors should also be canvassed during the book-build process in order to get the highest possible price for the shares".
There is also the concern that overseas investors could swoop in on "mums and dads" and buy up large numbers of shares post-float, something the Government could do little to stop.

After any potential exclusive offering to Kiwi investors, shares would be bought and sold just like those of any other company – on the stock market, through a broker.

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