The widespread opposition to Bill English’s privatisation proposal is not surprising after the Crown made a complete hash of its asset sales in the 1980s and early 1990s.
The original programme, which began in March 1987 with the initial public offering (IPO) of 12.9 per cent of the Bank of New Zealand and finished with the disposal of 100 per cent of Vehicle Testing New Zealand in September 1999, realised $19.1 billion (see table).
The asset sales were flawed for two main reasons:
* A number of strategic assets were sold to parties whose main objective was to extract maximum value for themselves with little regard for the long-term wellbeing of these organisations.
* Too many assets were sold to overseas parties and these now make a material contribution to the country’s current account deficit in the form of dividend outflows.
The strong opposition to privatisation is justified on past experience, but we have learned from our mistakes.
The last two major sales, Auckland International Airport and Contact Energy, have been successful and there are a number of arguments to support partial privatisation, particularly in light of the new KiwiSaver scheme.
Most of the privatised assets went abroad in the 1980s and 1990s because there were insufficient domestic savings to finance the purchase of these companies.
It would be a tragedy if the reverse occurred in the next 10 to 20 years, namely that there is a sharp increase in savings through KiwiSaver but a shortage of domestic companies for these funds to invest in.
The original asset sale programme started with the Bank of New Zealand IPO in 1987 and went steadily downhill from there. A Fay, Richwhite company acquired a 30 per cent stake in the BNZ in mid-1989 and when the bank got into trouble, the Crown effectively bailed out Fay and Richwhite and sold the BNZ to the National Bank of Australia for a fraction of its current value.
The Crown agreed to accept Equiticorp shares, not cash, in consideration for the sale of New Zealand Steel, and when Fletcher Challenge acquired Petrocorp in 1988, the Crown contracted to purchase 104.5 million Fletcher Challenge shares under a “put and call” option. These are the Fletcher Challenge shares sold in 1993 for $418 million, representing an $18 million profit.
The other disasters were Telecom, Air New Zealand and New Zealand Rail, which was renamed Tranz Rail after its privatisation.
Telecom’s owners put a strong emphasis on short-term profitability, which enabled them to sell their shareholdings for a massive profit.
The underinvestment during its early years under private ownership was the main reason for Wednesday’s announcement that Telecom would be split into three separate operating divisions in order to stimulate investment in the network.
Air New Zealand was sold for $660 million in April 1989 but in January 2002 the Crown invested $885 million back into the company to save it from the receivers. As these shares are now worth nearly $2 billion, the Crown has done better second time around from its investment in Air New Zealand.
The Tranz Rail privatisation has also been a disaster because the company was effectively bailed out by the Crown and Toll Holdings in 2003. In addition the Fay, Richwhite/Wisconsin Rail consortium said it would develop passenger services and instead closed many of them down while shares were sold to the public at $6.19 each, substantially more than the first Toll Holdings’ takeover offer of $1.10 a share, and the latest of $3.
The preferred privatisation model is a partial sale through an IPO.
Only Petrocorp, Bank of New Zealand, Auckland International Airport, Contact Energy and Capital Properties (100 per cent) were privatised through this method (Telecom, Air New Zealand and Tranz Rail had IPOs after they were acquired by private owners).
The Crown realised $1923 million, or 10 per cent of the total privatisation proceeds of $19,122 million, through IPOs. By comparison A$55,661 million, or 81 per cent, of the Australian Government’s privatisation proceeds have been realised through sharemarket floats.
The reason for this huge difference is simple – Australia has a massive pool of savings whereas we do not. Under the IPO model all the major former Australian Government-owned assets remain listed and under domestic control.
The good news as far as New Zealand is concerned is that the last two major asset sales, Auckland International Airport and Contact Energy, have been successful for a number of reasons including:
* The performance of these companies has improved substantially under the IPO model.
* They have delivered fantastic returns for domestic investors
* They remain listed in the face of numerous takeover offers.
The last point is important because many believe that under the partial privatisation formula fickle politicians will eventually sell all the shares and facilitate a successful takeover offer. The Crown can sell 100 per cent of any of its assets at the discretion of politicians. However, if a Crown-owned organisation is partially privatised then the company is subject to shareholder influence, the Takeovers Code and NZX rules.
Phil Pryke, the former Contact Energy chairman and a current director, has tried to sell the company a number of times but has been rejected by shareholders. The latest offers for Auckland Airport and failed bid for Qantas demonstrate that shareholders offer very effective checks and balances.
The Australian IPO model, as well as Auckland Airport and Contact Energy, demonstrate that there is a much better chance of keeping a company under New Zealand control, and performing for the best interests of all stakeholders, while partly privatised than when it is 100 per cent controlled by politicians.
The KiwiSaver scheme is likely to ensure that New Zealand shareholders will be much less willing to accept takeover offers than they have in the past.
The largest state-owned enterprises are Meridian Energy ($2.9 billion value in the latest crown accounts), Genesis Power ($2 billion), New Zealand Post ($1.2 billion), Mighty River Power ($1 billion), Transpower ($0.7 billion) and Solid Energy ($0.6 billion).
Air New Zealand is not a state-owned enterprise and Television New Zealand ($0.4 billion) is classified as a Crown entity.
There are strong arguments to support the partial privatisation of Meridian, Genesis, Mighty River Power and Solid Energy.
Partial privatisations would offer checks and balances, they would also subject these companies to the scrutiny of the market, improve their operating performance and give shareholders an opportunity to ensure they remain under domestic control.
Bill English’s proposal deserves serious and rational consideration as partial IPOs, with the majority of shares going to domestic investors, particularly KiwiSaver schemes, should ensure a far more positive outcome than the hopelessly flawed asset sales strategies of the 1980s and early 1990s.
Major Crown Asset Sales – Too few IPOs
|Telecom||4,250||1990||100% Ameritech, Bell Atlantic & four New Zealanders (1)|
|Contact Energy||2,331||1999||40% Edison Mission & 60% through an IPO|
|Forestry Corporation||1,600||1996||Fletcher Challenge 37.5%, Brierley 25% & Citifor 37.5%|
|Bank of New Zealand||850||1992||100% National Australia Bank after a partial IPO|
|Petrocorp||801||1988||100% Fletcher Challenge after a partial IPO|
|State Insurance Office||735||1990||100% Norwich Union|
|Rural Bank||687||1989||100% Fletcher Challenge|
|Post Office Bank||678||1989||100% ANZ Bank|
|Air New Zealand||660||1989||100% Brierley Investments consortium (2)|
|Auckland Airport||460||1998||An IPO of the Crown’s 51.6%|
|Fletcher Challenge shares||418||1993||Sold to institutional investors|
|NZ Timberland||366||1992||100% ITT Rayonier|
|New Zealand Rail||328||1993||100% Fay,Richwhite/Wisconsin Rail consortium|
|New Zealand Steel||327||1988||100% Equiticorp|
(1) Trevor Farmer, Michael Fay, Alan Gibbs and David Richwhite
(2) 65% Brierley Investments, 20% Qantas, 7.5% Japan Air Lines & 7.5% American Airlines