There is a widely held belief that the partial privatisation of state-owned assets is a complete ripoff, that taxpayers are being taken to the cleaners.


This opinion was expressed in a letter to the Weekend Herald following Air New Zealand’s recent profit announcement. The reader wrote: “Just a few years ago, the taxpayer bailed out the airline to the tune of $900 million. Wouldn’t it be lovely to run a company that when you make a profit, management takes credit and if you make a huge loss, the taxpayer bails you out. It is now time to repay its profits to the taxpayer.”


These comments are totally inaccurate, as an analysis of Air New Zealand – as well as Genesis Energy, Meridian Energy and Mighty River Power – illustrates that taxpayers have achieved fantastic returns from the Crown’s shareholdings in a number of NZX-listed companies.


Air New Zealand was incorporated in 1940 as Tasman Empire Airways and was jointly owned by the Australian and New Zealand governments. The NZ Government acquired full ownership in 1961, and the carrier was sold to a Brierley Investments-led consortium for $660 million in 1989.


In September 1996, Air New Zealand acquired 50 per cent of Australia-based Ansett Holdings and in February 2000 it acquired the remaining 50 per cent.


Ansett went bust in September 2001 and Air New Zealand was in serious financial difficulty.


The company reported a loss of $1425 million for the June 2001 year, and in October 2001 the Crown agreed to put $885 million into the ailing carrier. This comprised a $300 million loan, in the form of convertible preference shares, and the purchase of new shares for $585 million. The convertible preference shares were switched into ordinary shares in 2005.


In 2004, Air New Zealand had a rights issue at $1.30 a share and the NZ Government purchased a further $150 million worth of new shares.


What has the Crown received in return for its $1035 million Air NZ investment?


• It has collected total dividends of $765 million.

• It received $365 million for the sale of 221.3 million shares in November 2013 which reduced its shareholding from 73.2 per cent to 53.1 per cent.


Thus, the Crown has received a cash return of $1130 million for its $1035 million investment. In addition, its remaining 582.9 million Air NZ shares were worth $1446 million at Thursday’s closing price of $2.48 a share.


It is inaccurate to claim that taxpayers have been shortchanged by Air New Zealand and its management team when the Crown’s total investment of $1035 million is worth $2576 million. This includes dividends received, the proceeds from shares sold and the value of its remaining shares.


There is an argument that the Crown should not have invested in Air New Zealand in 2001 and should have let it go belly up because of its ill-conceived investment in Ansett.


There are a number of points to consider in relation to this argument, including:


• Air New Zealand makes a huge contribution to the domestic economy – it carried 9.2 million domestic passengers in the year to June, compared with 4.3 million domestic passengers in the June 2001 year.

• It now carries 5.1 million international passengers – New Zealanders and foreign nationals – compared with 3.6 million 14 years ago.


More importantly, New Zealand attracts more than 3 million international visitors, compared with 1.9 million 14 years ago.


Many of these arrivals are enticed by, and carried by, Air New Zealand.


It is highly unlikely we would have 3 million international visitors if Air NZ had been allowed to go bust.


Governments have played a major role in corporate rescue plans around the world, particularly during the global financial crisis. Rescued companies included American International Group (AIG), General Motors, Citigroup and Bank of America in the United States and Royal Bank of Scotland in Britain.


The US Government has made positive returns from its investments in AIG, Citigroup and Bank of America but not as large, in percentage terms, as the NZ Government has made from its Air New Zealand investment.


The important decision for governments is to decide which companies to assist and when to sell.


The Air New Zealand investment has had an extremely positive outcome for taxpayers, but the Crown sold its stake in Bank of New Zealand far too early and allowed National Australia Bank to reap most of the benefits from the taxpayers’ bailout.


Solid Energy has been allowed to sink or swim on its own, mainly because the Crown has decided coal is not a strategic New Zealand industry.


Another issue is the partial privatisation of Genesis Energy, Meridian Energy and Mighty River Power and whether taxpayers have had a positive outcome from this strategy.


One of the major arguments against the sharemarket listing of these electricity generators was that the Crown would lose 49 per cent of its dividend income if it sold 49 per cent of these companies.


The figures in the accompanying table tell a different story.


The Crown will receive total dividends of $440 million from the three electricity generators for the year to June, when they are all 51 per cent owned by the Government, compared with $485.8 million two years ago when they were all 100 per cent tax-payer-owned.


Thus the Crown has received $4308 million from the partial sale of these companies yet its dividend income has fallen by only $45.8 million. This is a remarkably positive outcome for taxpayers.


The reason for this is that companies usually lift their performance after an IPO, mainly because they are subjected to far more scrutiny. It is somewhat similar to a football team performing much better in front of 50,000 fans compared with at a training run with only a few coaches.


For example, Genesis Energy has gone from one shareholder to more than 55,000 shareholders, Meridian Energy from one to nearly 49,000 and Mighty River Power from one shareholder to in excess of 100,000.


In addition, all 24 directors of these three companies are shareholders, as are a large number of senior management.


The combination of a large number of outside shareholders, directors and senior management owning shares, and greater scrutiny by these shareholders and the media means that partially privatised companies are likely to perform much better than 100 per cent Crown-controlled entities. As a consequence, they also tend to pay higher, more sustainable dividends.


Port of Tauranga, which is majority-owned by the Bay of Plenty Regional Council, is an example of this. When the Mount Maunganui-based company listed in 1992, the council’s 56.1 per cent shareholding was worth $44 million and it received an annual dividend of $1.7 million from the port company.


The council’s 54.9 per cent shareholding is now worth $1256 million and it will get a $38.3 million dividend for the June 2015 year. This dividend would have been far lower if the port company hadn’t taken the opportunity to list on the NZX.


It is patently clear that a sharemarket listing and 51 per cent Crown ownership has been a win-win situation for taxpayers and investors in Air New Zealand, as well as the three electricity generators.


The Air New Zealand rescue operation 14 years ago is a great example of how the Crown can support an important company while also making an excellent return on its investment.


Brian Gaynor

Portfolio Manager

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.