Paul Glass: More scrutiny will help everyone

Opening up enterprises such as Mighty River Power to the public gaze should improve performance.

The performance of Mighty River Power will be much easier to evaluate after it is listed on the stock exchange. Photo / Supplied
The performance of Mighty River Power will be much easier to evaluate after it is listed on the stock exchange. Photo / Supplied

Transparency and engagement are important ingredients in building a successful business that serves the needs of all stakeholders.

Leaving aside political views on the partial listing of state-owned enterprises, one aspect that hasn't been sufficiently debated is the potential benefit that all stakeholders, especially the taxpayer, will get from the much greater scrutiny that businesses will come under as a result of being listed on the stock exchange.

Businesses listed on the exchange are typically analysed in depth by direct investors, fund managers, brokers and investment bankers.

The state of their affairs, strategy, management and board capability, relationships with customers and staff, financial strength and quality of governance all come under constant scrutiny.

They are benchmarked against local and international peers. Listed businesses are required to report formally and publicly every six months.

They have to front up at their annual meeting and face shareholders and analysts. Most listed businesses are reasonably transparent and have to engage with stakeholders to the benefit, I would argue, of the long-term health of the business. That's not to say that listed businesses are perfect - in fact most are far from it. But the level of scrutiny to which they are subject is a distinct improvement on the opaque world of government ownership.

SOEs were set up after the introduction of the SOE Act 1986. In June 2006, Trevor Mallard, the then minister of SOEs, made a directive encouraging the taxpayer-owned businesses to go for growth. SOEs were directly instructed to "expand into new areas of business that are linked to what they already do".

Underpinned by a strong economy and often near-monopoly positions most SOEs were paying big dividends back to the government and until this date most shareholding ministers expressed a preference for cash now rather than the prospect of greater returns later.

In 2006 SOEs, including Air New Zealand, paid total dividends to the Crown of $1.08 billion falling to $506 million in 2012. SOE dividend payments are lumpy but have averaged $648 million a year over the last eight years.

Under full government ownership of these businesses we have had very little visibility of the financial performance of these new endeavours until the Government started down the road towards partial listing of some of the SOEs.

In 2011 the Government called for scoping studies on Solid Energy, Mighty River Power, Genesis Energy and Meridian Energy. Some of the results made startling reading. For example, the board of Solid Energy believed that the company was worth more than $3 billion and yet two research papers put the valuation at closer to half this figure.

The big differences were the forecast price path of energy (coal) and the value of the new projects the company was keen to embark on.

Likewise, as a taxpayer I was very interested to find out that Mighty River Power, the first of the current set of SOEs to be partly listed, had invested US$250 million ($302 million) in an offshore fund, managed by an external party but in which it was the only investor. The fund would, among other activities, be exploring for steam in Chile and geothermal opportunities in Germany.

As part of the process of cleaning the company up for listing Mighty River Power has just announced that it will take a non-cash writedown on this fund of US$89 million and pay the overseas manager US$24.8 million to unwind the management contract.

Would these investments have been made if the companies were subject to greater market scrutiny? I think it less likely. There has been a strong drive inside SOEs to retain earnings for riskier projects rather than paying dividends and "losing" the money to the Crown.

Opponents of the mixed ownership model often argue that the companies will rort their customers post listing as they focus on increasing profitability. I'd argue that it's been going on for years in the government-controlled power generation and retailing sectors (just look at the increases in retail power prices over the last decade compared with wholesale prices which have been flat) and that again transparency is useful and may well result in effective regulation of the companies.

The Government is very reluctant to regulate companies which it owns and which are paying it large dividends. These businesses are often used as a hidden form of taxation (much like Watercare).

The benefits of partial listing have been highlighted by the divergent performances of the stock exchange listed Port of Tauranga (54.95 per cent owned by BOP Regional Council) and Ports of Auckland. Tauranga has been the best performer on the stock exchange over the past 15 years while Auckland was a strong performer when listed until the ARC bought out the 20 per cent of the business that it didn't own and privatised the business in 2005.

Since its delisting, Ports of Auckland has struggled on a range of measures. Annual dividends paid have more than halved, equity value has fallen and container volume growth has materially lagged Tauranga.

By our estimate the equity value of Ports of Auckland has fallen from $850 million in 2005 to $550 million now while Tauranga's has risen from $660 million to more than $1.6 billion.

The same arguments can be applied to co-ops and it is to be hoped that all Fonterra stakeholders will benefit from the business being opened up to outside scrutiny.

Sunlight surely is the best disinfectant.

Disclosure of interest: Paul Glass is chairman of Devon Funds Management. Devon Funds may well participate, on behalf of its clients, in the IPO of Mighty River Power.
Devon owns shares in the Fonterra Shareholders Fund and Port of Tauranga.

- NZ Herald

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