Rodney Hide: Maybe Mixed Ownership Model can sort it

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Dr Michael Cullen and former PM Helen Clark devised the Mixed Ownership Model. Photo / Mark Mitchell
Dr Michael Cullen and former PM Helen Clark devised the Mixed Ownership Model. Photo / Mark Mitchell

The state-owned enterprise Mixed Ownership Model that's causing such a fuss was pioneered by Helen Clark and Michael Cullen over a decade ago.

John Key and Bill English are simply extending it. The fuss over privatisation is a fuss about nothing much.

In 2001, the Labour Government spent $885 million bailing out Air New Zealand. Instead of taking over the company lock, stock and barrel, the Government took an 82 per cent stake and left the remaining share in private hands trading on the share market.

Hence was born the Mixed Ownership Model.

Mixed Ownership proved itself with Air New Zealand. The trading of the company's shares on the share market means its performance is continually and publicly assessed. That continual public feedback on performance is lacking with state-owned enterprises. Mixed Ownership provides a desperately needed market discipline on SOE directors and executives.

That's a good thing.

Labour pioneered the model and fully expected to be selling down shares as National is doing. Sir Michael Cullen told Cabinet, in setting up the model, that, "It may, however, be desirable to divest some or all of our shares at a future date." The Labour Government readily accepted that a future sell-down may well prove desirable. And not just some shares, but all of them.

In 2001, the Government was buying into companies. It's now selling down. The turnaround is not about political ideology. It's about the state of the Government's books. Back in 2001, net government debt was $20 billion and falling. It's now $52 billion and rising.

If ever it were desirable to swap debt for equity, it's now. I suspect that if the previous Government was still in power a similar swap would be under way. It was foreshadowed in 2001 and is now the responsible thing to do.

To replace debt with equity the Government is selling down its present shareholding in Air New Zealand to 51 per cent. It's also extending Labour's Mixed Ownership Model by selling off a 49 per cent stake in the SOEs Mighty River Power, Meridian, Genesis Energy and Solid Energy. The sale is to take four years and is projected to realise $6 billion. The Government in turn forgoes 49 per cent of the companies' profits. That income loss is expected to total $900m over four years.

On the upside, reducing government debt saves on interest. The $6 billion debt reduction saves $575m over the four years.

On that arithmetic the sell-down looks a bad deal for the Government. The expected savings in interest don't cover expected losses in profit. It would be better to hold the shares.

However, Treasury figures that the State Owned Enterprises are undervalued on the Government books and that the share market valuation will boost the companies' value. Treasury estimates that boost will result in an overall gain to the Government.

Time will tell if the Treasury is right. I suspect they're conservative.

The greater discipline that the trading of shares applies to these businesses will enhance their performance. There's no way Air NZ would have done as well if it were an SOE.

For Kiwis, it's the companies' better performance that will enhance the country's economy, not whether the Government makes a profit or loss on sale.

Two more points to hose down the hysteria. The Government still controls the companies with a 51 per cent stake. That means the companies continue to be fully consolidated in the Government's accounts. The so-called family silver stays on the family books.

The second point is that it's a very small part of the silver. Government assets total $264 billion. The $6 billion sell-down is only one bit of one candlestick. Remember, total government assets in 2016 are $264 billion without the sale - and $264 billion with the sale. The assets stay fully on the Government's balance sheet.

Over the next four years the Government's net debt is projected to rise an extra $20 billion, slammed up hard against Government assets. The Government is getting deeper in hock even as it's swapping debt with equity.

I think the Government should sell all its SOEs. That's because politicians focus on votes, not business value. Private owners put their focus where it should be: maximising the value of the business.

If I was a socialist keen on governments forever owning things, it's the rising Government debt that would trouble me, not a modest debt-equity swap. It's the out-of-control mortgage that makes people sell their house and car. It's not that they no longer want them.

- Herald on Sunday

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