David Farrar: Partial privatisation of SOEs

The Capital Market Development Taskforce was set up to recommend ways to remove constraints and utilise opportunities for the development of our capital markets.

The members of the taskforce were not handpicked by Rodney Hide, Bill English or John Key. They were picked by Lianne Dalziel in 2008, with assistance from Michael Cullen, Pete Hodgson and Trevor Mallard. So one would hope their recommendations will get serious consideration from both sides of the House.

One of their recommendations is that central and local government list some of their commercial assets on the NZX.

This is not a call for total privatisation of SOEs, even though there are some (including the author) who would welcome that. There is a political reality that most New Zealanders like the government owning certain major assets. They may be wrong, but they are the majority.

But a minority stake is a very different thing politically. The government can retain 51% or greater control but allow Mum and Dad investors to also purchase a direct share.

The CMDT point out that New Zealand is almost alone in the OECD, in not having the private sector own stakes in SOEs. Around 90% of SOEs in NZ are 100% state owned. In socialist Sweden it is only 75%, Helen Clark’s Norway 45%, the Netherlands 35%, Germany 30%, and France 45%.

So allowing the private sector a stake in SOEs is not some far right agenda only practised in the Austrian School of Economics. It is absolutely standard practice in most of the developed world.

What are the perceived benefits the CMDT sees from such listings? There are three

1. It would materially increase investors’ choices of domestic assets. There are relatively few attractive domestic companies in key areas such as energy, transport, and telecommunications.
2. The government, as majority owner, would benefit from the discipline and monitoring that would occur with a partial listing. Private sector participants with personal wealth at stake in these companies will be more effective at monitoring them than government could ever hope to be.
3. It would materially improve the depth of our capital market by increasing the size of the share market which in turn may make it more attractive to other large companies to list on the NZX

I would add a fourth benefit to this. It would also reduce government debt at a time when our public debt is increasing the rate of $250 million a week. Yes there would be a lower level of dividends in the future, but there would also be a lower level of interest paid on debt, and most of all a reduced risk to the government. This would help prevent credit downgrades or even assist with a credit upgrade.

The government has 20 SOEs on the books. In the last financial year they had turnover of $10.5 billion and an operating balance of only $654 million. If one floated a 25% stake in each SOE, it would only reduce the overall Government’s operating balance by $163 million.

Their equity stands at $25 billion. So the Govt could expect at least $6 billion from floating 25% of the SOEs. In reality it could be a lot more than their book value. But even on $6.25 billion, the reduction of debt by that amount would reduce the Govt’s interest bill by $400 million a year. So the government would be $240 million a year better off, the capital markets would prosper and hundreds and thousands of Mum and Dad shareholders would get the opportunity to have a direct shareholding in Kordia, Timberlands, Landcorp or even NZ Post.

The government ruled out before the 2009 election any listings during this term of Parliament. But surely they will be bold enough to go where Sweden, Norway and the Netherlands have gone, and campaign at the next election on a policy of allowing SOEs to list minority stakes on the NZX.