Government to pursue mixed ownership model

Hon Bill English
Minister of Finance

Hon Tony Ryall
Minister for State Owned Enterprises

19 May 2011

The Government believes there is significant merit in extending the mixed ownership model to four state-owned energy companies and reducing the Crown’s majority shareholding in Air New Zealand.

It will help reduce Government debt, increase investment opportunities for mum and dad investors and improve the companies’ financial performance, Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall say.

They confirmed the Government will take the policy into the election in November and that New Zealanders will be at the front of the queue for shares.

Treasury will now undertake preliminary work to prepare for extending the mixed ownership model to Mighty River Power, Meridian, Genesis and Solid Energy and reducing the Government’s majority stake in Air New Zealand.

This would happen in a three to five year programme starting in 2012, should the Government be re-elected in November - and subject to market conditions and results of detailed scoping studies.

“As we promised, we are now clearly setting out our policy to New Zealanders well before the election in November,” Mr English says.

“The Treasury estimates that extending the mixed ownership model to the four energy SOEs and reducing the Government’s majority shareholding in Air New Zealand are likely to free up between $5 billion and $7 billion of capital - depending on the final structure of the programme.

“The Government will be a substantial net acquirer of assets in the five years to 2015. Its total assets are expected to rise by $34.3 billion to $257.7 billion in 2015. About $21 billion of this increase is funded directly from within core Crown finances.

“Rather than simply borrow this amount, the Government will use proceeds from the mixed ownership model to recycle existing capital towards high priority future investment in assets like schools, hospitals and broadband. The proceeds will fund about a third of the Government’s new investment in core social infrastructure.”

Mr Ryall says the Treasury has confirmed that proceeding with the mixed ownership model can meet the five prerequisite tests set by the Government.

“This includes the Government maintaining majority control in the companies, New Zealand investors being at the front of the queue for shareholdings, and having confidence in New Zealanders securing widespread and substantial ownership in the SOEs,” Mr Ryall says.

“Ministers agree with Treasury advice that extending the mixed ownership model offers significant opportunities for New Zealanders – either directly or through their KiwiSaver accounts and other managed funds – to invest more in quality New Zealand companies.

“In addition, it will bring sharper commercial disciplines, more transparency and greater external oversight for the companies involved. And finally, it will provide opportunities for the companies to obtain capital to grow without depending entirely on cashed-strapped governments to support them,” Mr Ryall says.

Initial public offerings are the preferred method for extending the mixed ownership model, given the Government’s requirement to achieve widespread and substantial New Zealand ownership across the five companies.

No decisions have been taken on precisely how much of each company will be sold or when – other than the Government will retain a majority shareholding.

The Treasury will now prepare a mixed ownership model work programme for 2012 – although this will not commit the Government to proceeding before it receives a mandate at the election later this year. Iwi will also be consulted before the programme is finalised.

“It’s important to remember that the Government will remain a strong net investor in the next few years – it will accumulate an extra $34.3 billion of assets over the next five years alone,” Mr English and Mr Ryall say. “But we can’t continue to fund these assets by building up more debt indefinitely.”

The Treasury’s latest advice on the mixed ownership model is available at: www.treasury.govt.nz

MIXED OWNERSHIP MODEL – FACT FILE

Why we need to lift national savings

It is concerning that New Zealand has run balance of payments deficits every year since 1974 and net external liabilities – the debt indicator most closely watched by credit ratings agencies – have jumped to more than 80 per cent of GDP. As the Savings Working Group said: “The bottom line is that New Zealanders collectively have been spending too much and saving too little, using large amounts borrowed offshore to fund new investment.”

The Government needs to play its part

National savings include all parts of the economy – households, businesses and the Government. Households and businesses have lifted their savings rates sharply since the 2008 recession, but the Government has deliberately done the opposite to partly absorb the downturn on its own books. This was appropriate at the time, but it’s not appropriate now the economy is growing again.

Growth in the Government’s assets

The Government runs a large investment programme, but until now it has had little visibility. The Government, on behalf of taxpayers, owned more than $220 billion of assets at the end of the last financial year. This is expected to grow by $34.3 billion by 2015, reflecting ongoing investment in schools, hospitals, broadband, electricity, roads, rail and a range of other assets. Under current arrangements, much of this money would have to be borrowed from foreign lenders.

Better managing commercial assets

The combined net value of all SOEs (excluding KiwiRail) and the Crown’s holdings in Air New Zealand was about $15 billion in 2010 – they make up around 8 per cent of the Government’s total balance sheet. Changing the mix of these assets – through extending the mixed ownership model – would help to fund future priority investments and ensure public debt levels remain prudent and sustainable.

Extending the mixed ownership model

Earlier this year, the Government asked Treasury for advice on the merits and viability of extending the mixed ownership model currently used for Air New Zealand – where the Government retains a controlling shareholding, but offers a minority stake to outside investors. Specifically, it asked for advice on extending this model to Mighty River Power, Meridian, Genesis and Solid Energy. It has also sought advice on the merits of reducing the Crown’s shareholding in Air New Zealand, while still maintaining a majority stake. No other SOEs are being considered for this model.

Advantages of the mixed ownership model

There are several advantages:
• It frees up capital for the Government to invest in higher priority areas such as schools, hospitals and broadband, while reducing its need for extra borrowing.
• Air New Zealand has operated successfully under this model, since it was introduced by the previous Government.
• It improves the pool of investments available to New Zealand investors and deepens the capital markets.
• It allows companies to access capital and grow without depending entirely on the Government.
• External oversight places sharper discipline and more transparency on a company’s performance. It is doubtful that Air New Zealand would have performed as well as it has outside this model.

The Government’s five tests for proceeding

The Government has decided to pursue extending the mixed ownership model after being assured the following five tests can be met:

• The Government will maintain a majority shareholding stake by owning more than 51 per cent of each company.
• New Zealand investors will be at the front of the queue for shareholdings, and the Government is confident of widespread and substantial New Zealand share ownership.
• The companies involved will provide good opportunities for investors.
• The capital freed up will be used on behalf of taxpayers to fund new public assets and thereby reducing the pressure on the Government to borrow.
• The Government is satisfied that industry-specific regulations will adequately protect New Zealand consumers.

What is the Treasury’s advice to the Government?

The Treasury is confident that all five of the Government’s tests above can be met. It has advised that extending the mixed ownership model:

• Has significant merit because of the potential to reinforce efficiency, fiscal and capital market policy goals, and provide moderate economic gains.
• Is viable over a three to five year programme, but is a complex undertaking by international standards.
• Will require a high degree of flexibility.

New Zealanders will get priority in buying shares

New Zealand investors will be given first priority to buy shares in the companies. Experience from previous government initial public offerings (including Contact Energy and Auckland International Airport) suggests we can achieve widespread and substantial New Zealand ownership across the five companies. There is substantial capacity between KiwiSaver funds, other managed funds and retail investors, the Government’s own investment arms and iwi. Detailed decisions to achieve this are yet to be made.

Preferred option for selling minority shareholdings

Initial public offerings (IPOs) are the preferred method of extending the mixed ownership model, given the Government’s requirement to achieve widespread and substantial New Zealand ownership across the five companies.

How much will the Government retain in each company?

No decisions have been taken on precisely how much of each company will be retained by the Crown – other than the Government will retain a majority shareholding.

Implications for other state owned enterprises

No other SOEs are being considered as candidates for the mixed ownership model.

The Government’s decision and next steps

The Government will take the policy into the election in November. The Treasury will now prepare a mixed ownership model work programme for 2012 – although this will not commit the Government to proceeding before it receives a mandate at the election later this year. Iwi will also be consulted before the mixed ownership model programme is finalised.

ENDS

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