Iwi may be steaming over the Government’s plans to convert State-owned enterprises into “Mixed Ownership” businesses - but so will the country’s “Mum and Dad” investors when they find out what the iwi are being told.

Everyone should read the iwi consultation paper on the Governnent’s plan to convert the four energy sector State-owned enterprises into “Mixed Ownership” businesses with 49% of their shares in private hands. The paper raises issues that go far beyond the current hot topic of whether the new businesses should carry the Treaty of Waitangi obligations that currently apply to them in state ownership.

The consultation paper is as important for what it doesn’t say, as it is for what it does. The iwi consultation document contains no reference to the Government Ministers’ widely touted pre-election expectation that between 85 and 90 percent of the shares sold will be in New Zealand ownership, or to its soothing statements that it will be creating a sound opportunity for the sorely-tested “Mum and Dad” investors in the country.

The Government’s New Zealand ownership expectations are now expressed in a vacuous statement about a “test” requiring that New Zealanders will be “at the front of the queue for shareholdings and the Government is confident of widespread and substantial New Zealand share ownership”.

Of course, that test will be met. The Government will hold 51% of the shares to begin with, and the investment bankers managing the sale will be offering shares directly to large investors [such as Kiwisaver Funds, other managed funds, and – if they wish – to iwi] during what’s called the “book build” – a type of pre-issue auction that determines the price for all investors.

But while New Zealand institutional investors may be at the front of the queue in the book building process, it looks like “Mum and Dad” investors will be in the tail.

If demand exceeds the supply of shares available, the Government will “scale” allocations to interested investors. It will have control over which groups of investors get their share order scaled down and by how much. It will also determine the definition of “widespread and substantial New Zealand share ownership” as it sees fit – 65%, 75%, 85%, 90%, who knows?

The Treasury reminds me, in a response to an Official Information Act request, that the Government’s objectives include “optimizing the value for the Crown of the Mixed Ownership companies and freeing up capital for other uses…”

The Treasury also confirms that it still holds the view that “significant participation by foreign investors will be essential to achieving the Government’s overall objectives.” Even if the Government resurrects its old “expectation” of 85-90% New Zealand ownership, that still means foreign investors could be solicited in the book building to buy between 20% and 30 % of the shares on offer to generate more competition among potential buyers and crank up the value of the return on sale to the Crown.

The iwi consultation paper makes no statement at all about any specific limit being placed on foreign investment in the Mixed Ownership companies. It also says nothing about limiting share buyers – domestic or foreign - as to the number of Mixed Ownership energy companies in which they can hold shares.

The paper also contains a major contradiction about the cap on individual shareholdings. Early in the piece, it says the Crown will bind itself to hold 51% of the shares in the Mixed Ownership companies, and “no other investor will be able to hold more than 10 percent of the shares with voting rights in each company.”

That statement is contradicted a few pages later. Under an innocuous heading about “Placing the companies under new legislation”, the paper also says “trustee corporations or nominee companies that hold shares on behalf of other persons may be exempt from the 10 percent limit”.

It seems possible that a single trustee corporation or nominee company could acquire a very powerful position by investing in all the Mixed Ownership companies in the strategically important energy sector, under the terms outlined to the iwi.

The danger of this situation is highlighted by another statement in the consultation document. In previous papers released by the Government, there was discussion – but no resolution – of matters such as Crown veto rights on the appointment of directors, the number of Directors to be nominated by the Crown [and voted into office by the 51% owner],and other Crown voting rights on business standards and special resolutions.

That discussion is over. The consultation paper says crisply that the Crown “will not reserve any special rights to itself, except that it is still to decide whether it will have any special power to approve the Chairman of the Board, as it has for Air New Zealand.”

So, if the Crown has no special powers, beyond those of a 51% shareholder in an ordinary listed company, what particular ability does it have to ensure its Treaty obligations – or any other broader social obligations – are met.

Iwi have every right to be cautious about the Government’s proposals for Mixed Ownership. The rest of us should be just as cautious. There are too many loose ends in the plan that’s being rushed into place.

Comments (11)

by Chris Webster on February 09, 2012
Chris Webster

David: Not looking for a conspiracy - BUT -- your analysis and questions are similar to those which we had also identified -

But not as elegantly as you. Or perhaps ala John Key.

Therefore armed with 'futher opinion' we will be placing our combined observations before Bill & Wira and Tony during these conversations.

Wanna come - you can be my advisor - kinda like a shadow Nick Farr Jones

 

by David Beatson on February 09, 2012
David Beatson

Chris - I leave the politics to you ... What concerns me is that we are not seeing enough information on a vital issue in the mainstream media. We've got too many circuses running and we're running out of bread.

by Chris Webster on February 09, 2012
Chris Webster

We do not disagree with your comments.  We too are concerned at the running out of time for pleasantries. Methinks also the NZMC will be very disappointed.  

Gee - thinking out loud here - what would 'Moms & Dads' (my parents) have gotten in terms of information and knowledge had 'bill and his mates' were not required to consult with Maori people - as per s9? 

A cynic just remarked that 'non-Maori got a chance to say 'yes' or 'no' - when they voted for National. And at pre-election what volume or depth of information was available then - to anybody? 

Few punters foresaw the current impasse. We did and wrote RFI under OIA also. The responses were to use an 'elegant' phrase - unsatisfactory.

Too many circuses running (like?) and running out of bread (money, dosh, pinga's?

 

by David Beatson on February 09, 2012
David Beatson

Chris - we both know voters gained a minimal level of information about the plan for extending the "Mixed Ownership Model" during the election campaign, and the mainstream media debate on the issue never went long or deep enough to get past the spin doctors' simplistic arguments - selling the family silver versus running the country deeper into debt. You make a good point about the significance of the Section 9 consultation in flushing out the facts.   

by Ian MacKay on February 10, 2012
Ian MacKay

"no other investor will be able to hold more than 10 percent of the shares..."

My Mum buys 10% of shares.

My Day buy 10% of shares.

My Bruvver buys 10% of the shares.

My wife buys 10% of the shares.

I buy 9% of the shares and I speak on their behalf. Aha.

by David Beatson on February 10, 2012
David Beatson

Fine - as long as you can get in before the institutions and the others being directly approached in the book build - and trustee corporations or nominee companies that hold shares on behalf of other persons who may be allocated more than 10%- and the Government doesn't scale you and your family out during the allocation process.

by william blake on February 10, 2012
william blake

Excuse my naivety David, can you explain how preferentially selling to New Zealanders first, will give the biggest and or best price for the 49% of available shares? Which is after all the whole point of selling an asset.

Will the value per share be decided by an international benchmark and if so will this not exclude most Kiwis anyway? Won't  the shares simply go to the place/country/corporation with the most liquid cash looking for a safe investment?

by David Beatson on February 10, 2012
David Beatson

William, it's not naivety that's the problem - it's a lack of clarity and detail in the Government's explanation of the sales process. I can't answer your questions on the basis of what I've read in the consultation paper and the officials documents that have been released to date.

by stuart munro on February 11, 2012
stuart munro

It's this kind of laissez faire attitude to asset sales that made the other ones unpopular with the public. Funny how each NZ government contrives to be even worse than the one before.

by DeepRed on February 13, 2012
DeepRed

The plot thickens indeed.

So, where are Mum & Dad's shares? It's quite simple really.

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