Good case for partial SOE privatisation?

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We need to think more about partially privatising state owned assets, argue Susan Watson and Chye-Ching Huang, from the University of Auckland's Business School.

Air New Zealand is profitable and innovative, proving how government ownership of a listed company can be the best of both worlds. Photo / APN
Air New Zealand is profitable and innovative, proving how government ownership of a listed company can be the best of both worlds. Photo / APN

Partial listing of some state-owned enterprises deserves a closer look.

Potential benefits include better performance - it is thus an opportunity to improve New Zealand's lacklustre growth and productivity.

Solutions adopted in other countries, with a dose of Kiwi ingenuity, may offer ways to address concerns that have dominated - or rather forestalled - debate about SOEs, if we allow ourselves to consider the options.

Crown-owned businesses that have at least some commercial objectives are a large and growing part of the Crown's balance sheet.

The 16 Crown-owned companies that operate for the main part as competitive commercial enterprises are valued at more than $13 billion.

But Treasury advised in 2008 that the performance of SOEs has "eroded over time" and that the model, while sound "needs to be reinvigorated".

Problems identified included quality of board appointments, reluctance of SOEs to increase gearing, and need for greater transparency and monitoring.

While steps short of privatisation are being taken to improve performance, partial listing offers three potential benefits.

First, partial listing of some non-essential SOEs could increase their value. The scrutiny of the market would lead to improved monitoring of their performance. A market share price is a transparent measure of performance and value that currently does not exist for SOEs.

Valuing SOEs is difficult. Take Solid Energy's valuation of itself at $3.3 billion versus two independent valuations of $1.7 billion.

Pay-for-performance measures linked to the share price or stock options could be introduced. The capital markets would inject capital into our SOEs and permit them to leverage their assets to borrow for capital investments and growth.

Second, the New Zealand sharemarket would benefit. At a time where there is a dearth of new listings, deepening and broadening the market by the partial listing of SOEs would clearly be welcome.

Few would disagree that the capital market in New Zealand offers limited investment options. Do we want another generation attempting to grow wealth through dubious investments or through continued reliance on bricks and mortar?

Alternatively, do we want a flow of capital into the Australian sharemarket?

Third, considering partial listing would force us to identify those businesses Government owns more through inadvertence and inertia than intention. It is the former group that could be partially listed.

Examples that could be considered include Quotable Value, and Learning Media, an educational publishing business. Is either core government business? How many New Zealanders know that there is an SOE - Asure New Zealand - that provides an export red meat inspection service? The acid test may be to ask if we think the Government should buy these businesses if it did not already own them.

There may be sound strategic reasons for government to hold stakes in commercial enterprises. Air New Zealand is an example: there is good evidence that national airlines provide more direct flights to their home market and invest in promoting their home country, which is important for our prosperity as a small, remote country with a large tourism sector.

And, New Zealand is enjoying those strategic benefits while holding less than a 100 per cent share in Air NZ.

Air NZ is profitable, high-profile, and innovative with the ability to attract and retain competent management. In short Air NZ (admittedly not by design) shows how government ownership of a listed company can be the best of both worlds.

But the public good objectives of our many current commercial ventures may be less obvious than the reason for holding a majority stake in Air New Zealand. Is the reason we hold 100 per cent of Meridian Energy - valued by its board at about $6.7 billion - security of energy supply or to subsidise consumers or for financial return or other reasons? Do any or all of these objectives require a 100 per cent stake? Clarifying what these SOEs are supposed to deliver is a prerequisite to holding them accountable for delivering it.

Other countries have recognised the potential benefits of partial privatisation. Our review of the available literature and international evidence - part of our ongoing research into the options for better managing SOEs as a portfolio - suggests that if well-designed, partial privatisation may deliver benefits.

We can learn from successes and mistakes made internationally, and from our own experiences of the 1980s. Some countries, including Malaysia and Singapore, have adopted a holding-company structure where a portfolio of state businesses are held by a parent company with a top quality board.

Equity can be sold either in the holding company or in the subsidiaries. Singapore's Temasek holds about US$130 billion ($170 billion) in assets.

As a long-term investor, Temasek seeks to "Enhance sustainable value" and can invest in, rationalise, consolidate or divest holdings "Where it makes sense and where [Temasek] can achieve clear shareholder value".

One objection even to partial privatisation of SOEs is that all New Zealanders already "invest" in SOEs through their government ownership, and that the share of SOEs partially privatised would be scooped up either by a few wealthy interests or by overseas investors.

A response to this objection is that if done right, partial listing of SOEs could lead to an increase in asset value of the entities - increasing the size of the pie. Some have proposed that the money raised by SOE floats could be used to inject fresh capital into other SOEs, or to fund the acquisition of stakes in new, internationalising Kiwi ventures. All New Zealanders would continue to own a share of that pie through the Government's continued holding. Many New Zealanders may also end up holding stakes in these companies through their KiwiSaver scheme or through investment by the New Zealand Superannuation Fund.

A carefully structured listing could address some concerns around partial privatisation. Shares ownership could be restricted to New Zealand nationals. Air NZ already has a partial restriction of this type.

All "mums and dads" could have a chance to own shares by allowing New Zealanders to participate pro rata in any initial public offering. Of course, such design choices may have tradeoffs: potentially impacting on share price, and the ability of large institutional investors to bring value to the enterprises by monitoring management.

Partial privatisation is worthy of careful consideration. Inertia is not always the best policy. We should not ignore the range of options that may exist to manage the state's commercial ventures better.

Professor Susan Watson and senior lecturer Chye-Ching Huang are from the University of Auckland Business School's Commercial Law department.

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