The Herald asked departing NZX boss Mark Weldon (who has spent the past 10 years 'living and breathing' the NZ capital markets) to chart a bold action plan to grow the market. Weldon is very confident his 'Top 10 for the next 10' will, if implemented and executed, take the NZ capital markets, and economy, a long way forward.
1 Foreign investment - "build a bridge over the minefield".
Labour Finance Minister Michael Cullen stared down the Auckland Airport takeover bid using the rationale it was a "strategic asset". This is a good rationale. Unfortunately, neither then, nor since, has the term "strategic asset" been clearly defined. Crafar farms is, as a very predictable consequence, a complete mess.
How Crafar farms ended up where it did, while the seeds business sold by PGW sailed through without a whisper - when those seeds have been core to our competitiveness in agriculture as core NZ Inc intellectual property - I will never know. No wonder investors are confused. The Crafar fiasco is just the latest iteration creating a fickle brand for New Zealand as a place for foreign investors.
Foreign investors do not mind a high bar - and that is appropriate. What they do mind - and rightly - is a bar they think is in one place, but then pivots during the Overseas Investment Office process and ends up bashing them in the head. This probably needs a small taskforce - not Treasury as they do not seem to view any assets as strategic - to form a pragmatic, but clear framework and process for foreign investment, and for both major political parties to sign up to not fiddling with it.
Potential conditions could include imposing NZ Inc conditions on consent, such as having an NZ resident chairman or set of independent directors, and, providing transparent information to stakeholders, either via a public listing, or via listing-like disclosure requirements if the company is private and above a certain size.
2 A real single economic market - "not a diet of hope".
To take the Single Economic Market (SEM) programme forward we should look at adding a commerce clause to the Closer Economic Relations agreement (CER). The Commerce Clause of the US constitution is simple, powerful, and proven to work. Under the Commerce Clause, no US state can impose any tax or regulation that creates a barrier to business greater than exists for businesses domiciled in the state.
For example, New York cannot tax New Jersey companies doing business in New York at a higher rate, or impose any different tax on the distributions made to shareholders. If there was a Commerce Clause added to CER both New Zealand and Australia firms would be able to raise and distribute capital equally across both countries. At the moment, the non-recognition of franking credits (Australia) and imputation credits (New Zealand) is a real barrier to SEM commerce and capital flows.
The lack of ability to distribute Australian franking credits across New Zealand and Australian shareholders, and the same for New Zealand imputation credits, is a real barrier to SEM commerce and capital flows. Until there is one system of imputation available to companies and investors across New Zealand and Australia, regardless of where you are domiciled as a company, the flow of transtasman commerce will remain sub-optimal. Adding a commerce clause to CER would fix this.
On the corporate side, the Australian Treasury backed Westpac and ANZ in their aggressive lobbying against a Reserve Bank-proposed regulation regarding banks being required to have their critical New Zealand-based payments IT in New Zealand, saying it was ridiculous, added cost, and no benefit.
Well, the Australian Treasury is now looking at creating regulation in Australia that proposes exactly what they decried not so long ago - for the benefit of the ASX and to the detriment of its competitors, and their customers. The proposed regulation says that clearing houses will have to be located "physically" (whatever that means for software) in Australia if they want provide clearing services for Australian customers.
A commerce clause would allow NZX and ASX, for example, to offer platforms and services across both countries from one place. NZX could offer its clearing system to, for example, UBS in Sydney, competing with the ASX - and vice versa. Competition would increase, costs of operations would fall, and innovation would increase. This is motherhood and apple pie. The same, by the way, should apply to stock exchanges - more competition on both sides of the Tasman would occur if a commerce clause was added to CER.
3 Agricultural commodities - "NZX a regional hub".
Chicago had grain farms, then grain markets, and then grain futures - ending with the Chicago Board of Trade - the best futures exchange in the world. New Zealand has the same opportunity to build a hub of agricultural and capital markets activity around dairy. Fonterra is the foundation. The second plank is Fonterra's Global Dairy Trade auction platform - which from my travels in the world of offshore dairy would see better outcomes for Fonterra if it were not owned by Fonterra but by a neutral operator.
The final piece of the puzzle is the NZX Dairy Futures market. This market has started strongly, and hit all its milestones, but is a long way yet from its potential. This will take accurate, continued execution by the NZX team in dairy products, and a New Zealand Inc approach.
Each futures market globally has one franchise product: in Chicago it is grain, in Malaysia it is palm oil, and on Nymex it was Brent Crude. For NZX, and NZ, that centrepiece has to be dairy. If dairy futures continue to hit their targets, this market will end up the same size or bigger than the NZX's equities market, with all the second order benefits that a range of hedging tools and the platform to develop products in beef, lamb and so forth will bring to the economy. New Zealand will become a specialist with a unique position in global markets.
4 Build a P-class for our SMEs.
The P-class yacht, relatively ugly and certainly unique, was responsible for training many of New Zealand's greatest sailors like Barbara Kendall and Russell Coutts, who went on to great things. New Zealand needs a bridging market.
This market needs to have a light rule touch, no continuous disclosure but prescribed information disclosure, and a different type of relationship that makes it worth broker's while to bring $15 million companies to market. This relationship would involve the companies paying for liquidity provision via a market-making scheme, and ongoing research services. It is do-able. And it could move the dial. The new Financial Markets Conduct bill may allow such a market. It should, for the small end of town getting bigger is a key to our future.
5 From little things - "Too few big things grow"
New Zealand has a promising tech sector. But we are desperately tired of seeing companies being sold too early, too small and too cheaply. Critically, the tax rules that do not allow losses to be carried forward at less than 66 per cent ownership means partial sales hardly ever happen. Instead we get masses of Navman-like 100 per cent trade sales, which end up being a poor outcome for New Zealand, with all the IP, skills, and well-paying jobs disappearing offshore.
To realise the vision put forward by people like Sir Paul Callahan, our tax rules around partial ownership must change. If they do not, the rational thing to do will be to continue to grow a company to more than the value of a bach, then sell it. Combined with a P-class market, a change to tax rules - a "nudge" in the tax code will have huge impact on our prospects.
6 The Mixed Ownership Model (MOM) programme - serve up a "Mighty Good Meal".
People learn deep lessons from their personal experience. As a kid, when you fall over you learn that grass is soft and concrete is hard. Feedback is instant. As an adult, we go back to restaurants that give us a good meal. There are enough choices out there that we stay away from restaurants that undercook their food, or have surly service.
If new investors have a great experience with the Mighty River Power (MRP) float - dividends, share price, communications from the board, and so forth then, just like a great restaurant, they tell their friends, and the whole MOM programme will fly.
The MRP partial float is critical to the whole programme, and under Joan Withers' chairmanship, there is a perfect opportunity to kick-start the partial privatisation programme with aplomb. However, it is not all up to Joan - Treasury is involved and driving a lot of it. This float should not be about Treasury extracting the last cent from the float, but about pricing it fairly, and about kicking off a great experience through the entire MOM programme.
Success also means getting as many people as possible into the market for the first time, and giving lots and lots of new investors the opportunity to invest - without a minimum size limit of more than, say, $500.
New Zealanders own these companies now. So they all need to be given all a chance to play, and thus give New Zealand the real chance of creating an ownership culture. If "cost per holder" is the issue, I am sure the Registries will negotiate.
7 KiwiSaver - "Serve a well balanced meal".
The Capital Markets Development Taskforce recommended moving the default provider settings for KiwiSaver away from a heavy cash focus to a more balanced set of investments across stocks, bonds and cash. For a 22-year-old plumber with 40 years of KiwiSaving in front of him/her this makes sense. However, no politician really wants to do this as they risk KiwiSaver balances declining on their watch if they "mistime" the market.
This made sense when Michael Cullen established the scheme, as a bad first year would have tarnished its brand. Now, however, KiwiSaver is sacramental; part of New Zealand's DNA. To not change the default settings now will leave a lot of KiwiSavers worse off, and prevent the growth of a savings pool that compounds in its growth and is able to easily make its way into Kiwi companies, fuelling growth, and jobs.
8 Take the ADD out of our Regulators.
In regulation, it is a truism that stable, well-used, well-litigated, well-understood regulation ends up being lower cost. This is why US companies incorporate in the state of Delaware - its corporate law has been unchanged for decades, and is well understood.
With certainty, comes confidence, speed and healthy innovation. The changes to the Resource Management Act have shown that this can be done with New Zealand now an increasingly favoured destination for new jobs because of the clarity and certainty of the new RMA processes.
The same needs to happen to capital market regulation once the Securities Act rewrite (Financial Markets Conduct Bill) is finished - give the regulators some Ritalin!
9. Capital gains -'Give it a (little) nudge'.
Too much business - especially land-based business - in New Zealand remains essentially a tax play, where debt is too high, free cashflow is not the focus of value creation, and the end game is a tax free "flick".
It is not practical to move to a full capital gains tax, and, as it became clear at the Tax Working Group the evidence is mixed. However a "nudge" in a direction that forces "pure capital gains plays" to become more balanced "cash and gains-focused" will do a lot to reallocate capital, and to reduce the external deficit the private sector holds.
The Cass Sunstein book Nudge is a great playbook for small interventions, like the elimination of depreciation on rental properties implemented last year, that move the system to a better footing without being disruptive.
10 Fonterra - "Walk the herd to market".
Fonterra's "Trading Among Farmers" (TAF) must occur, and the Fonterra Shareholders' Fund must work.
This is critical to Fonterra's strategy, and critical to building a bridge between agriculture and capital markets domestically; a bridge that at the moment has some very strong support arches, but no well-travelled, resilient road across them.
I am on the board of a large dairy farm. The ability to sell Fonterra shares yet retain full control, and remain a part of Fonterra - rather than having to move to a competitor is an attractive mix.
Though this has not been a focus of the PR, the TAF scheme both helps reduce the instability in Fonterra's balance sheet, and helps farmers manage their balance sheets more flexibly.