Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Asset slush fund an investment cop-out

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Government should follow Singapore's example and invest in wide range of enterprises. Photo / Supplied
Government should follow Singapore's example and invest in wide range of enterprises. Photo / Supplied

John Key and Bill English have tried to defuse some of the inane paranoia over National's partial privatisation plan by promising to put an estimated $5 billion to $7 billion revenue from five share sell-downs into a special slush fund.

This so-called Future Investment Fund is for public infrastructure and other new capital projects over the next five Budgets - assuming National gets a second term. Sounds good, doesn't it?

But it is a misnomer to label the FIF an "investment fund" as the revenue from the partial privatisations of Meridian Energy, Mighty River Power, Genesis Energy and Solid Energy together with that raised from the sell-down of the Crown's 75 per cent holding in Air New Zealand, will not be reinvested in income-producing assets. It will simply fund what really should be viewed as standard Government capex.

This is short-sighted.

By putting all the share sale proceeds into the Consolidated Fund - in essence a Budget smoothing exercise - Key and English are passing up a great opportunity to create an investment fund of scale which could invest in revenue-producing assets.

The obvious example is Singapore's Temasek Holdings - an investment company owned by the Singapore Government.

Temasek manages a $197 billion portfolio which includes a 55 per cent stake in Singapore Airlines and 54 per cent of telecom operator Singtel.

Temasek is an active investor. It has stakes in financial services, telecommunications and media, technology, transportation, industrials, life sciences, consumer goods, real estate, energy and resources.

The Singapore Government established its holdings company in 1974.

The initial portfolio was worth $350 million comprising shares in companies, start-ups and joint ventures previously held directly by the Government - everything from a bird park, to a hotel, shoemaker, detergent producer and start-up airline.

By putting the assets into a commercial company, the Singapore Government hoped to free up its Ministry of Finance to concentrate on its core role of policy-making and leave Temasek to own and manage these investments on a commercial basis.

Given the current National-led Government has already counted the entire proceeds from its planned sell-down as revenue in future Budgets, it probably does not want to alter course.

But there is no reason why a Kiwi version of Temasek could not be set up to hold the Government's majority stakes in nominated commercial assets and then run an active portfolio policy which maximised the return to the Crown through dividend streams and capital paybacks when warranted.

For instance, a well-capitalised holdings company could have booked profits by selling down Air NZ shares when they were at their peak during the Cullen era and bought more back when they subsequently slid.

Such a vehicle could also buy shares in distressed NZ companies when private players will not step up to the mark then sell them on to local KiwiSaver funds and other such investors once they have been restructured.

If the New Zealand Government had such a fund in place when PGG Wrightson was in strife, it could have injected capital in return for a key stake and kept an asset which is critical to this country's pastoral farming future.

Arguably the NZ Super Fund (aka Cullen Fund) could also have done this. But its risk appetite is governed by the need to grow revenue to smooth future National Super flows.

Temasek's own investment philosophy is to invest in industry sectors that correlate with the economic transformation of the country; find opportunities where growth is fuelled by the increasing purchasing power of middle income populations; tap the potential of competitively positioned companies; and identify emerging champions.

It is disappointing given the options available to it, that National is opting for cosmetics. The FIF is simply something National's campaign team has conjured up to build public acceptance for the sell-down of the Government's holdings in five particular state-owned commercial companies to 51 per cent, instead of simply promoting outright the potential for many stakeholders to benefit from the mixed ownership model which exposes companies to private sector discipline and greater scrutiny and allows them to access capital and grow without being fully dependent on the Government.

In the 2010 Herald Mood of the Boardroom survey, John Palmer made a strong business case for the mixed ownership model. Palmer said the success of the Air New Zealand model where the Government, which owns the majority stake, acts as a cornerstone shareholder can provide stability for strategy in a really tough business.

"The board and management are not distracted by thinking about the state of the share register. They can just concentrate on the strategy of making the business more successful."

Labour's Phil Goff is clearly indignant about National's intentions. But his credibility is suspect given he was part of the fourth Labour Government which flicked 100 per cent shareholdings in a raft of publicly owned assets during the late 1980s and 1990 in a trade sales process.

Out on the campaign trail, National is basically saying it wants to sell down assets to realise sufficient cash to enable the Government to fund some new public assets "without having to borrow more from overseas lenders and increase interest payments at a time when finances are extremely tight". It is a valid enough scenario given the sovereign debt downgrade where the Government faces considerable risk if it continues to pile up more debt in the short term. It is also what cash-strapped Governments do when they want to avoid serious cuts to expenditure or raising taxes.

- NZ Herald

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