Labour needs more mongrel in privatisation issue

Such is John Key's Midas touch, he could probably sell ice-cubes to Eskimos - and at a premium price. Selling the merits of even partial privatisations to once-bitten, ever-shy New Zealanders ahead of the November election will be a far tougher test of the Prime Minister's undoubted skills and acumen.

National may have smoothed and soothed the language - "mixed ownership model" sounds far less provocative than "privatisation" and "asset sales" which carry more baggage than that required for Lady Gaga's extravagant wardrobe. No-one is fooled. An asset sale is an asset sale no matter the anodyne verbiage in which it might now be wrapped.

For once, public sentiment is skewed heavily in Labour's favour. The polls run consistently two-to-one against such sales. The big question is just how deep that antipathy runs.

National is considerably heartened that its post-election intention to float minority stakes in four energy-related state-owned enterprises - electricity generators Genesis, Meridian and Mighty River Power plus coal company Solid Energy - has not provoked more of an outcry. So far, Labour's campaign against the sales - which also includes a cutting back of the crown's shareholding in Air New Zealand - is lacking the X-factor.

It is too predictable. Too pat.

Labour needs to show some mongrel and put the frighteners on a public wondering whether the National leopard has changed its spots and will hold to its promise to retain Government-owned majority stakes in those companies. Or whether the mixed model is a charade disguising what may be a halfway house to full privatisation.

Labour needs to make merry hell with the foreign ownership bogie - perhaps to a point bordering on xenophobia. As an internationalist, Phil Goff cannot do xenophobia, which many in Labour will be grateful for. But so too will Mr Key. The Prime Minister has made selling the rationale for the public floats a personal challenge.

Privatisation will remain a dominant, if not the dominant issue through to and during the official four-week election campaign because National and Labour are opposites on the matter.

So far, they are only skirmishing - the case this week in Parliament as Labour fired questions at Mr Key and Finance Minister Bill English.

Labour was trying to tease out what restrictions will be imposed on foreign investors buying shares - both in the floats and through subsequent trading on the stock exchange.

Labour knows it must also win the argument surrounding the permanent loss to the crown of dividends from a one-off sale of up to 49% of the shares in each state-owned enterprise.

Here, Labour is going for broke and trying to get such figures as the $732 million that those companies contributed in dividends last year emblazoned in neon.

Labour does not mention the obvious: that more than half of that revenue stream would be retained by the crown.

Neither does it point out that the figure was well under $200 million the year before. While the five-year average is about $530 million, that includes more than $1 billion-worth of one-off special dividends including $600 million from the sale of Meridian's Australian subsidiary Southern Hydro.

The Treasury estimates the impact of foregone dividends and retained profits balanced against reduced interest costs to be marginal in terms of impact on the Government's finances.

That gives credence to concerns about the performance of state-owned enterprises in relation to the size of their equity. Their dividend stream has also been adversely affected by the economic downturn and those enterprises retaining capital for reinvestment which a cash-strapped Government is reluctant to provide.

National, however, is also reluctant to give too much attention to such failings. It is in a tricky position. It is trying to sell the shares as a good investment. It will also be seeking to maximise the price of the shares to get the highest return once the staggered floats get under way after the election.

Striking the right balance also applies to the even more politically volatile question of foreign interests taking up shares. The Government is not saying much about that until it receives advice on the sort of mechanisms it could apply to entice small investors to hold on to their shares.

One such option is a "loyalty bonus" which would give shareholders an entitlement to further shares if they held on to their initial allocation for, say, a year. Such mechanisms are designed to "lock in" shareholdings and deter post-float profit- taking.

One particularly inventive idea in Treasury documents is to distribute some of the shares as KiwiSaver tax credits to lock in New Zealand ownership, but would probably be too inflexible for the Government's liking.

There are other ways to achieve substantial New Zealand ownership - separate shares for local and foreign investors, residency requirements and imposition of ownership caps on foreign entities. National will be reluctant to go for the latter given its open-door attitude to foreign investment and Treasury warnings such restrictions will depress the price.

However, it is equally inconceivable that National will go into the election campaign not having covered off this vulnerability which will otherwise be exploited by Labour to the maximum.

The indications are that the floats will be open first to small investors and New Zealand institutions like KiwiSaver providers and the New Zealand Superannuation Fund. Next will be Australian institutions in recognition of the transtasman equity market. Only then will foreign investors get a look in.

National is confident domestic demand will be high enough to limit foreign ownership to about 5%, so National may be able to neutralise concerns about loss of sovereignty.

National's difficulty is that actual ownership patterns will not emerge until the share floats are completed. But that will be after the election.

National is relying on Mr Key's and Mr English's assurances that New Zealand's power stations and coal mines will not become subject to undue foreign influence are convincing enough beforehand.

 - John Armstrong is The New Zealand Herald political correspondent

 

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