On the plans to sell state assets

soes, state owned asset sales

At yesterday’s post-Cabinet press conference Prime Minister John Key said that work ‘had not yet begun’ on deciding which state assets – if any – would be sold during his government’s second term.

Voters would be told what assets would be on the “sale” list, he promised, well in advance of next year’s election. The immediate trigger for this assurance were comments made to a gathering of business people last week in Christchurch by his deputy Bill English that flagged the government’s intention to assess the sale prospects of a number of state assets, including Kiwibank. In English’s opinion, such a partial sale “would free up capital, and put product on the market for Kiwi mums and dads.” Allegedly, Kiwibank “needed to be dealt with”. Keep the majority Crown ownership but raise the rest of the capital from the market, English indicated, was the way to go.

Despite the government’s wide-eyed assurance that it hadn’t yet started doing any work on this subject, the sale of state assets has clearly been on its agenda since well before the last election. Even the promise not to sell such assets in the first term implied that all bets would be off during the second term. Moreover, English was secretly taped in 2008 stating National’s intentions to sell Kiwibank “eventually”. A more recent rationale for state asset sales came late last year when the Capital Markets Development Task Force urged the government to sell off minority stakes in a range of state assets. Among the Task Force’s reported recommendations :

Broadening the range of high-quality equity offerings for retail investors by encouraging partial listings of central and local government-owned companies, agricultural businesses like Fonterra and local subsidiaries of financial services firms.

The chairman of that Capital Markets Development Task Force was Rob Cameron, a long time advocate of selling minority stakes in state assets. So much so that in 2007, United Future MP Gordon Copeland invoked Cameron in a question to then Finance Minister Michael Cullen about the benefits of selling minority stakes :

When Rob Cameron, the New Zealand Exchange, the employers and manufacturers, and many other financial experts all favour the sale of a minority stake in State-owned enterprises to Kiwi investors, why does the Minister cling to 100 percent State ownership as a non-negotiable, and is this not just an extreme form of socialist ideology at the expense of maximising New Zealand’s economic potential?

The obvious answer to this query came a few moments later in a related exchange between Cullen and New Zealand First MP Doug Woolerton :

WOOLERTON : Would the Minister agree that those with enough capital to buy State assets are likely to be deep-pocketed foreign companies, and would he also agree that if State assets are sold to them, we are likely to see a repeat of the situation in the 1980s and 1990s when privatised assets were sold to the rich and most profits disappeared overseas?

CULLEN : The reality is that whether by way of public float or by way of trade sale, there is a high likelihood that much of any sale of State assets would end up in foreign hands. We have also seen in that regard in many instances a lack of commitment to expanding those assets within New Zealand. In some cases, therefore, the Government has had to step in and buy back those assets or engage in further regulation of the market to serve the interests of the New Zealand economy. The difference between some of us on this side of the House and others on that side of the House is that we have learnt from experience, but they insist on repeating their mistakes.

Labour’s ability to oppose the current intention to sell state assets could be more difficult though, than it might seem at first glance. Yes, it can wheel out Jim Anderton, the Godfather of Kiwibank, to decry the wickedness of tossing this prize asset into a shark pool dominated by the Aussie banks. Yet on the other hand, it was a Labour government that chose Cameron to head the task force that came up with the recommendation to sell minority stakes in state assets.

Moreover, it is hardly accidental that the Key government is framing this notion in terms of opportunities for “Mum and Dad investors”. That happens to be the argument used in the mid 2000s, by then SOEs Minister Trevor Mallard to justify selling partial states in non-core state assets. On this Agenda programme in 2008 for instance, TVNZ’s Guyon Espiner played a Mallard voice track from 2006 in which Mallard said :

‘Something that we could do and something that I’m quite keen on is that as the SOEs develop the new businesses especially those that are done in partnership with people in the private sector, we could well have floats of the subsidiaries so that they could be listed on the Stock Exchange, that could help give a bit of depth to our capital markets and get some transparency around those companies, and I think that would help.’

It was, in fact, a theoretical position by the Clark government, concocted in the absence of any suitable examples to make it real.

ESPINER : What have you done on this policy, two years ago you were gonna help Kiwi mum and dad investors get on the share market and invest in these partially floated SOE subsidiaries, what work have you done on it?

MALLARD : There’s been quite a lot of discussion and there’s been not much progress mainly because none of the non-core subsidiaries are big enough to be interesting to the Stock Exchange.

In other words, it could well come down next year to an argument between Labour and National about what should and what shouldn’t be on the core vs non-core list of state assets for sale. Otherwise, when it comes to the partial sales mechanism and the terminology (“Mum and Dad investors”) and the Task Force chairman who was driving the process, the two major parties seem to have been in virtual agreement. The current argument between them seems about the degree of core-ness, and is not one based on the principle of not selling any more state assets, period.
There are so many bizarre ironies in this asset sales issued that one hardly knows where to state. The same Jim Bolger whose government sold the BNZ to the Aussies ended up as board chairman board at Kiwibank and leading the charge against the hegemony of the Aussie banks. Things get even stranger when one considers the alleged plight of the New Zealand sharemarket today.

A few months ago, in an article called “Why Kiwis Should Float” Stuff’s Business Day reporter Catherine Harris traced the plight of Hamilton-based company BioVittoria as it struggled to raise capital on the anaemic local sharemarket. You’d have thought any company would have struggled, mid-2009, to raise capital. This time though, Andrew McDouall, a BioVittoria adviser and head of Wellington brokerage McDouall Stuart, blamed it on failings in Kiwi psychology and on the poor state of the New Zealand sharemarket.

In Mr McDouall’s opinion, capital markets in New Zealand are “quite sick”. Although the government is tightening regulations to improve confidence in the financial system, he also blames the New Zealand psyche. Our low level of savings, and a Kiwi distrust of the sharemarket after the 1980s crash, have funnelled available funds away from equities into houses, finance companies and conservative investments.

So umm… the sharemarket’s failings are self inflicted; they reflect the lack of workable ways of deterring punters from investing in houses, and are based on the historical experience of investors. All up, that suggests the Kiwi psyche is actually in pretty good shape, and fairly immune to sharemarket spin. Why would anyone want to toss more state goodies into that poisoned pond? Yet wouldn’t you know it: Rob Cameron pops up later in the same story to once again urge the New Zealand government to sell partial stakes in state assets.

I don’t think New Zealand’s got a choice around doing some of these things … New Zealand is the odd one out by not doing this and the choice that governments make not to do that has a bigger impact on our investor choices and our capital market than probably any capital market in the OECD.”

But hold on a moment. If McDouall is right, firms can’t raise capital mainly because Mum and Dad investors got burned in the 1987 crash and are now investing elsewhere – so isn’t it utterly rational for them to avoid putting themselves at risk again? It is certainly not a good reason for hocking off more state assets, in order to lure punters back into the New Zealand sharemarket, and thus rescuing the market from taking responsibility for its past sins.

This is a an especially relevant question now, given that the same Mum and Dad investors who bought in Telecom at its time of sale, are now reaping the consequences of the firm’s self-inflicted woes, a set of problems that can be traced directly back to Telecom’s unbridled arrogance during the 1990s. These days, people tend to think Telecom was an outright trade sale – it wasn’t, as Michael Cullen had to remind Don Brash during this exchange in the House in 2006:

BRASH : I raise a point of order, Madam Speaker. Mr Copeland asked the Minister a question during the course of that questioning about whether Telecom had been partially sold down to mum and dad investors. There was quite a lot of noise going on in the House and I am not sure I heard the Minister correctly, but I think he said that, yes, Telecom was sold in part in a trade sale, and in part to mum and dad investors. My recollection is that Telecom was sold outright in 1990 by the Government, of which Helen Clark was Deputy Prime Minister at the time, to a series of large American corporates and a small number of—I think, two—New Zealand wealthy investors.

CULLEN : It would be very helpful to have all the facts. The member got as far as his memory took him; however, he forgot it was a condition of that sale that there was a subsequent on-sale down on the New Zealand sharemarket.

Point being, the government – and Rob Cameron – aim to use the dire state of investment in the New Zealand sharemarket as a rationale for selling partial stakes in more state assets. In fact, the 1980s programme of asset sales and lack of regulation at the time serves to explain a lot of the market’s current difficulties in raising investment capital. One can ask whether Cameron – whose day job has always been to broker such deals – was really the best person to offer independent advice on this subject. In the 1980s, one of the reasons the asset sales programme fell into disrepute was that firms like Fay Richwhite were partly brokering the deals for government on one hand, and sometimes – as with NZ Rail – jumping across to the other side of the table to act as a buyer on the other.

Hold on – what does this 2005 news story on Cameron Partners own website say about the firm’s origins?

[Cameron] left Treasury in August 1984 to join Jarden & Co, a Wellington financial institution, and was part of a group of investment bankers who moved to set up an investment banking team at Fay Richwhite in Wellington in 1986.

Fay Richwhite supplied much of Cameron & Co’s early talent base.

So now, in 2010, the same firm that grew out of Fay Richwhite is advising the Key government on the wisdom of selling partial stakes in state assets – a business for which it has a lot of the necessary expertise and, one imagines, a long list of potential clients. Is this looking like the 1980s all over again to you, too? The trouble with the cliché about those who forget the lessons of history being condemned to repeat it is…even when you do remember the lessons of history, there is no guarantee you won’t be forced to relive them.


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