Softening us up before going for the hard sell

Many people are starting to believe that the National-led Government is preparing to partially privatise several state-owned enterprises, with Finance Minister Bill English indicating there would be strong demand for Kiwibank shares. Business editor Dene Mackenzie investigates what is on offer.

Banks, utilities and, until recently, airlines, are sought after investments by both institutions and private investors, and the New Zealand Government owns assets in all of those classes.

Before the last election, the National Party said it would not consider sales of state-owned enterprises (SOEs) in its first term.

But with the now National-led Government half-way through its first term and riding high in the polls, the feeling is that this is a good time to start softening up the public for some sales.

New Zealand has been through this before with governments of both the left and the right, and Prime Minister John Key took delight in reminding Labour leader Phil Goff of just that this week after being criticised in Parliament.

In response to Mr Goff's questions about the sale of state assets, Mr Key replied that Mr Goff made a good point.

"Maybe the Minister of Finance and I should have a chat with the Leader of the Opposition, because that is the man who sold Telecom, the State Insurance Office, the Post Office Bank, Air New Zealand, the Tourist Hotel Corporation, New Zealand Steel, Petrocorp, the Government Printing Office, the DFC, the National Film Unit, the Rural Banking and Finance Corporation, the Shipping Corporation, New Zealand Liquid Fuel Investment, Maui Gas, SynFuels, forest cutting rights, Health Computing Services and Communicate New Zealand.

"If there is ever a man who knows ... about privatisation, it is that one," Mr Key said.

National would have a clear position on whether it would sell state-owned assets but needed to "kick the tyres" around first, the Prime Minister said this week.


 His comments were prompted by Mr English saying Kiwibank had reached a size where it needed either a government guarantee or "an awful lot of capital".

He suggested there would be strong demand for shares in it.

Mr Key said National would go into the election next year with a clear position but could not say what it was because it had not been discussed internally.

Kiwibank is estimated to be worth around $800 million to the Government.

Craigs Investment Partners broker Chris Timms said a Kiwibank float would no doubt be flooded with investors wanting a stake in a New Zealand bank.

Investors wanting bank shares in their portfolios now had to look across the Tasman at Australian-owned banks.

The Government would need to somehow limit the investments to New Zealand residents to maintain faith with the New Zealand public although there were ways around those sorts of rules, he said.

One of the ways was for overseas investors to set up New Zealand resident companies and use them for investments.

Bank investments were seen as resilient to most market volatility and tended to have good cash flows and provide good income, through dividends, for shareholders, Mr Timms said.

Forsyth Barr broker Peter Young said there would be much interest in the Government selling down partial holdings of some of its SOE holdings.

"There would be good interest from the public and institutions in companies like Solid Energy, Television New Zealand, NZ Post and Kiwibank," he said.

"The Government already owns around 75% of Air New Zealand so it could also look to do a partial sell down to 50.1% but they would be unlikely to do this at the current price that the airline is trading at, being $1.18."

In their current form, there was no real accountability of how those SOE companies should be valued and their profit performance had not been good, he said.

Any form of sell down would clear those matters up as shareholders would expect price performance and there were strict rules for listed companies under the NZX.


"It is well know that TVNZ has not been performing in recent years so this may not be as popular as, say, some of the energy companies," Mr Young said.

Genesis Power, Meridian Energy, Mighty River Power and Transpower would be popular investments with institutions with a long-range investment horizon.

The New Zealand Superannuation Fund, along with overseas pension funds, takes a different view of energy assets than do private investors, who look for the share price on an annual basis, rather than a long-term income from dividends.

Mr Timms said the energy companies did not have a very good rate of return on investment but provided some sort of social role through Government ownership.

Putting those energy companies into partial, or full, private ownership would inevitably mean prices going up, as the companies were benchmarked against others in the industry, such as Contact and TrustPower.

Contact was majority owned by Australia's Origin Energy but TrustPower was controlled by Infratil, a New Zealand utility investment company.

"With two or four companies in the same industry, people will go to the one that offers the best returns," Mr Timms said.

"Whether or not privatising those companies will bring new money in or not is the big question.

"People would be deciding whether to take their money out of Contact and put it into the new companies.

But there is no doubt there would be some new money coming into the market," he said.

Air NZ is something of an unknown quantity.

The former Labour government paid about $1.5 billion to buy back and refinance the company when it was at risk of going bankrupt.

Mr Timms said the airline had been paying dividends to the Government - $76 million in the last financial year - and was providing a regular income stream.

"If there was ever a time for the Government to move some of the airline on it is now but they might not want to."

The warning, as always, was that once you sold the assets it was nearly impossible to buy them back, he said.

The rail assets were the exception to that rule, but if Meridian was sold, the Government could never buy it back at the price for which it was sold.

Labour Party SOE spokesman Clayton Cosgrove said mum and dad New Zealand investors already owned Kiwibank and other state assets through something called taxation.

Those taxpayers would see through Mr English's motives in saying that National was thinking about giving Kiwis a chance to buy Kiwibank all over again.

"The reality is that if part of Kiwibank goes up for sale, it won't be Kiwi mum and dad investors who buy the shares.

It will be large foreign institutions who want to grab a slice of this popular and growing young bank that is actually owned by Kiwis," he said.

Green Party co-leader Russel Norman said privatising Kiwibank would result in even greater amounts of capital leaving New Zealand in the form of bank dividends drained from the economy.

In the past five years, the four foreign-owned banks sent close to 75% of their profits offshore in the form of dividend payments to their overseas owners.

"If the Government was to privatise Kiwibank, the dramatic flight of capital out of New Zealand by foreign banks would become even more pronounced," Dr Norman said.


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