John Key’s hottest line from the last election campaign could come back to haunt him as he ploughs ahead with the expansion of the “Mixed Ownership Model” by selling shares in a batch of state-owned assets.
The new National-led Government delivered a fine present as it shut down for Christmas – a big dump of official documents on its plans to extend what it calls the “Mixed Ownership Model”. The Sale of the Century is scheduled to start in the third quarter this year and continue all the way through to next election in 2014.
Having run out of holiday reading in the long wait for fine weather to arrive, I tried running through the new document dump, followed by a bout of back-tracking through previous official releases, budget support documents, clippings of news coverage, and transcripts of the political debate over what was supposed to be the defining issue in the 2011 election. It was just what I needed on those endless rainy days: a mind-numbing experience.
Let’s dispose of Air New Zealand for starters. It has been presented as “a good example” of the Mixed Ownership Model. In fact, it isn’t. To conform with the MOM specifications announced by the Government on 15 December, Air New Zealand’s existing shareholders would have to approve a constitutional change so that no shareholder other than the Government is able to own more than about 10% of the company. It might also have a problem in putting New Zealanders “at the front of the queue” for shares the Government wishes to sell - if there are any foreign shareholders left in the business. It should have no difficulty in meeting the requirements for 51% ownership by the Government, or its shareholding Ministers’ “expectations” of 85-90% New Zealand ownership.
Given the current depressed state of the international aviation market, the constitutional complication, and a proposed review of Government policy on the ownership of New Zealand airlines that operate internationally, Air New Zealand is not likely to be an early runner in the state asset sales stakes.
The real MOM pioneers will be the 100% state-owned energy enterprises: Mighty River Power, Meridian, Genesis and Solid Energy. They are the big bangers that the Government believes will pull in $5 billion to $7 billion when it sells 49% of its shareholdings to private investors through a series of IPOs over the next three years. By contrast, it will reap just $280 million by selling down its Air New Zealand shareholding to 51% - if it is very lucky.
Treasury has had an army of external advisers and consultants crawling over these potential MOMs trying to work out their market value.
The results – released just before Christmas – show some major differences between the values recorded in the Government’s books, the commercial values placed on the enterprises by their boards of directors, and independent valuations produced by the external consultants.
The book value for Genesis is $1,712 million, its Board's commercial valuation is $2,120 million, and the independent valuation is $1,763 million. For Meridian, the numbers run $4,931 million, $6,500 million, and $6531 million. For Mighty River Power, they are $2,906 million, $3,719 million and $3,631 million. And for Solid Energy, the various valuations are $519.4 million, $2,773 million, and $1,689 million.
So we get massive variations in the total valuations for the package of MOM enterprises - their total book value is $10,068.4 million, total board valuation is $15,112 million, and total independent valuation is $13,614 million. And it looks like there are some major arguments to be resolved between the independent valuers and the boards of Genesis Energy and Solid Energy before anyone starts setting share price targets for their initial public offerings.
Next, let’s recall the supplementary document issued by Treasury with the Budget on 19 May last year. It stated the potential proceeds from the share sales could be $6.8 billion and went on to calculate that the loss of future dividends and foregone profits resulting from the sale would be outweighed by the consequent reduction of borrowing and interest payments.
However, the independent valuations and the Treasury projections of fiscal impacts were both produced before the Government announced that it would cap individual shareholdings at 10% and its expectation of 85-90% New Zealand ownership. And this raises another interesting question: what is that expectation of demand based on?
Two days before the election, the Ombudsman advised complainants seeking the release of official advice on expected take up of shares and the impact of a 10% cap on individual holdings that the Minister of Finance’s office had advised her that “the basis for the 85-90 per cent expected take up and the 10 percent shareholding cap was oral advice provided by Ministers’ economic advisers and informal discussions with market contacts”. That advice is now open to challenge.
The pre-Christmas dump includes a Treasury document – dated15 December – stating that in May 2011, the Treasury’s advisers Deutsche Bank and Craig Investment Partners surveyed their New Zealand retail client base to gauge the likely level of demand. Nearly 90% of the 4,951 respondents were interested in investing in one of the assets nominated for sale, with over 50% claiming to be either very or extremely interested.
This isn’t the first time there has been obfuscation on official advice available to the Government. On 7 July, Finance Minister Bill English fudged his answer to a pointed question in Parliament from Labour’s house leader Trevor Mallard. Mallard asked:” What is the official advice that he has received on whether foreign investment would be essential to his plan for privatizing assets? “ English responded: “We have not received any advice that it is essential.”
In fact, a Treasury report to the Minister dated 4 March 2011 states: “Widespread and substantial [New Zealand] ownership is achievable, but significant participation by foreign investors will be essential to achieve the Government’s overall objectives.”
The Prime Minister fended off attempts to follow up Mallard’s question by claiming it was phrased “in relation to Mr English’s plans… His plans are to ensure that there is widespread New Zealand ownership, not to maximize the share price by flogging shares off to foreigners , as Phil Goff did when he was running the show.”
However, widespread New Zealand ownership is only one of the Government’s objectives. It also wants to ensure the MOM companies “present good opportunities for investors”. Every limitation the Government puts in place to secure its own level of ownership at 51% and cap individual private shareholdings at 10%, and every measure to ensure foreign investment is held to less than a total of 15% and encourage 85-90 percent New Zealand ownership will affect the demand, initial value, and liquidity of trading in the after-market for MOM enterprise shares.
MOM enterprise share values will also be affected by unresolved questions about the appointment of directors, the Government’s voting power or veto rights as a shareholder,its freshwater strategy, related treaty issues and iwi participation, further reform of the Resource Management Act, and the future of the emissions trading scheme.
Somehow, I think the Prime Minister will be coming back from his holiday to face his own killer punch: “John, show us the money.”