Brian Gaynor: Work needed to ease asset sale fear and loathing

Michael Fay (left) and David Richwhite were among the handful of Kiwis who benefited from the sales of crown assets in the late-80s and 90s. Photo / NZ Herald

The huge media coverage of the proposed sale of further Crown-owned assets is not surprising given the terrible mess our politicians made of this process two decades ago.

According to figures compiled by Treasury, the Government realised $19.1 billion from the sale of assets between 1988 and 1999 (see table).

These sales were highly controversial because they enriched a number of overseas investors and a few New Zealand business people.

These included Michael Fay and David Richwhite through Telecom, Bank of New Zealand and Tranz Rail; Alan Gibbs and Trevor Farmer through Telecom and Graeme Hart from his Government Printing Office purchase.

These asset sales have also been widely condemned because the Government had to bail out BNZ, Air NZ and Tranz Rail while the politicians bypassed the initial public offering process, whereby shares are sold to the general public in favour of a 100 per cent trade sale to a consortium or industry participant.

The sales process effectively began on February 12, 1987, when BNZ issued a prospectus for the sale of shares to the public at $1.75 each. Technically this was not an asset sale because the bank was issuing new shares, representing 12.9 per cent of the company, with no money going to the Crown.

However it did signal the beginning of a process that accelerated in 1988 when the Crown agreed to accept Equiticorp shares, rather than cash, for the sale of New Zealand Steel.

DFC was also sold to the National Provident Fund (80 per cent) and Salomon Brothers (20 per cent). In addition Petrocorp was acquired by Fletcher Challenge in 1988 after 15 per cent had been earlier sold to the public through an IPO.

The only direct Crown IPOs were BNZ, Petrocorp, Auckland International Airport, Capital Properties and Contact Energy (Telecom, Air NZ and Tranz Rail had IPOs after they were acquired by private owners).

The Crown realised $1.9 billion, or 10 per cent, of the total privatisation proceeds of $19.1 billion through IPOs. By comparison A$56 billion ($72 billion) or 81 per cent, of the Australian government's privatisation proceeds have been realised through sharemarket floats.

Four of the largest Australian government IPOs - Commonwealth Bank of Australia, CSL, Telstra and Qantas - now have a combined sharemarket value of A$164 billion.

In addition $11.9 billion, or 62 per cent, of our asset sales went to overseas parties whereas a clear majority of Australian assets were sold to domestic interests (the disposal of Telecom is classified as a 100 per cent offshore sale because Fay, Richwhite, Gibbs and Farmer received their shares from the new American owners at a later date).

Australia had more IPOs and domestic sales because it has a much bigger savings pool and politicians across the Tasman were willing to take a more considered approach towards privatisation.

As a result of haste our government sold to the wrong parties and this resulted in a number of massive wealth transfers. Some of the worst examples included:

Telecom's owners put a strong emphasis on short-term profitability, which enabled them to sell their shareholdings for a massive profit. Under-investment during its early years under private ownership has been the main reason for increased regulation of the company.

The Crown effectively bailed out Fay and Richwhite by selling the BNZ to National Bank of Australia for a fraction of its current value after a Fay-Richwhite firm acquired 30 per cent of the bank in 1989.

Air NZ was sold for $660 million to a Brierley Investments consortium in April 1989 but in January 2002 the Crown injected $885 million back into the company to save it from receivership.

The Tranz Rail privatisation was also a disaster as the Fay-Richwhite consortium failed to meet its promise to invest in the freight and passenger side of the business. The company had to be effectively bailed out by the Crown and investors, who participated in the IPO at $6.19 a share and suffered huge losses.

The good news is that the last three large privatisations - Auckland International Airport (1998), Capital Properties (1998) and Contact Energy (1999) - were all direct IPOs. They have generated little controversy, have been successful and have widespread New Zealand participation.

The proposed next round of asset sales - which includes Meridian Energy, Mighty River Power, Genesis Power, Solid Energy and Air NZ - should be similar to the Auckland International Airport model with the Crown maintaining majority control.

Nevertheless, politicians will have to proceed with caution because the electorate will need continual reassurance that there won't be a repeat of the Telecom, BNZ, Air NZ and Tranz Rail debacles.

There are a number of issues that politicians will have to address if the next round of asset sales is to avoid the mistakes and criticism of the last phase. These include:

The Government has to convince the public that these companies will remain majority Crown and New Zealand controlled. This should be easy to achieve because under the Takeovers Code, which wasn't introduced until 2001, a shareholder must go from 19.99 per cent to 50.01 per cent in one step and this will be impossible to achieve if the Government has at least 50 per cent ownership.

Domestic investors should be incentivised to invest in the IPOs, either on their own accounts or through their KiwiSaver schemes. This can be achieved by offering shares at a discount to individual New Zealand investors and KiwiSaver funds.

Domestic investors must be encouraged to hold their shares rather than bail out as they did with Contact Energy. This can be done by offering individual investors and KiwiSaver funds a share bonus arrangement, for example one new share for every 15 shares, if they keep their shares for a certain time period.

KiwiSaver funds should be the best long-term holders because they will continue to have strong cash inflows and utility companies are ideal investments for long-term superannuation schemes.

Politicians have to make sure that the investment bankers who manage the public offering don't pull the wool over the eyes of Treasury officials as they have in the past.

The Treasury has to take control of the IPO process and make sure that New Zealand investors have preference over the big overseas clients of these investment banks.

It is critical that top-notch directors, particularly younger ones, are appointed to the boards of these companies rather than cronies of the ruling political party.

Investors bailed out of Contact Energy partly because of their lack of confidence in a number of the directors and the problems at BNZ, Telecom, Air NZ and Tranz Rail were mainly due to poor corporate governance and the absence of strong independent directors.

Prime Minister John Key's announcement of asset sales is welcome but it is not a quick fix for our struggling stock exchange or for the country's savings and investment problems.

The reignited sales process will be scrutinised carefully to ensure that the mistakes of the 1980s and 90s are not repeated.

The sales process will have to be staggered because electricity generators will dominate the sales process and diversified portfolios won't want to overexpose themselves to this sector until these former state-owned enterprises prove that they can be successful listed entities.

The NZX badly needs more new, private sector companies but there are few signs of these on the horizon at present.

* Brian Gaynor is an executive director of Milford Asset Management.