Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Incentives key to luring lots of asset buyers

29 comments
Mighty River Power's share price could be pushed up if the sale plan's incentives favour small investors. Photo / Sarah Ivey
Mighty River Power's share price could be pushed up if the sale plan's incentives favour small investors. Photo / Sarah Ivey

Prime Minister John Key reignited the partial privatisation debate with his announcement that all New Zealanders would be entitled to $2000 worth of Mighty River Power shares and would receive additional bonus shares if they held them for at least three years.

The announcement was greeted with howls of criticism mixed with some support.

The critics say the Crown should not sell any shares and, if it does, there should be no incentives for wealthy purchasers.

Supporters of partial privatisation believe the Crown should not own production assets and the partial sell-down will give a huge boost to struggling capital markets.

There is a large amount of academic literature on the subject that enables us to assess the pros and cons of privatisations and incentives for retail investors.

There is widespread consensus that the two aims of privatisation are:

To raise money to repay government debt.

To boost a country's capital markets through the sale of shares to the wider public.

The main objective of New Zealand's privatisations in the 1980s and 1990s was to raise money to repay debt. As a result, these were mostly 100 per cent trade sales rather than sharemarket floats, because vendors receive more for a 100 per cent sale to a trade buyer.

The Telecom, Air New Zealand and Tranz Rail floats were initiated by trade buyers after the Crown had sold out.

Twenty years ago, New Zealand's politicians did not see privatisations as a tool to boost capital markets, whereas politicians in other countries did.

For example, less than 10 per cent of the $19.2 billion raised by the New Zealand Government from earlier privatisations was through sharemarket floats, compared with nearly 50 per cent in Australia.

A study by the Helsinki School of Economics shows that Britain has had 55 privatisations through sharemarket floats, France and Portugal have had 43 each, Italy 34, Spain 23, Austria 22, Australia 10 and New Zealand only four.

These were Petrocorp, Bank of New Zealand, Contact Energy and Auckland International Airport.

The main Australian floats were Commonwealth Bank, Telstra, CSL and Qantas.

These were extremely successful in encouraging widespread share ownership - Commonwealth Bank now has 795,000 shareholders and Telstra 1,390,000.

The New Zealand Government did not offer any retail incentives for its four sharemarket floats, but the Australian Government did.

The Australian public received A10c a share discount on the Qantas IPO on up to 20,000 shares, and one bonus shares for every 25 shares still held one year later, with a maximum of 800 bonus shares.

The Helsinki School of Economics study looked at 360 sharemarket privatisations throughout the world and found 181 had retail incentives.

The most popular incentives were bonus shares, followed by IPO share price discounts and staggered instalment payments.

The problem facing the Key Government is that a sharemarket float is a political decision because retail incentives can be targeted and right of centre governments can use these incentives to expand their support base.

For example, the National Government could follow the Qantas example, or it could have a one for eight bonus on up to a maximum of $2000 worth of Mighty River Power IPO shares.

The Qantas approach would benefit wealthy investors; the $2000 limit would encourage individuals with small amounts to invest in Mighty River Power.

International studies show governments have to offer more and more incentives if they want to encourage a large number of retail investors, particularly when there is large income inequality.

Incentives are even more important in a difficult economic environment.

The Helsinki study shows that every percentage of retail incentives increases the number of shareholders by 21 per cent.

So the Key Administration has a difficult political decision.

Does it give a low level of incentives, resulting in Mighty River Power shares being bought mainly by wealthy individuals and institutions, or does it offer more generous incentives and attract a large number of investors?

Another issue is the role of the Government as both an issuer and a regulator of Might River Power and the other electricity generators.

The 1984-1990 Labour Government sold Telecom through a trade sale to maximise the price, but the 1999-2008 Labour Government had a policy switch, mainly through increased regulation, which resulted in a large redistribution of wealth from Telecom shareholders to consumers.

One of the positive features of the Mighty River Power float is that the Crown will continue to hold at least 51 per cent, so any reduction in the company's value, through increased regulation, will also affect the Crown.

This gives some protection to minority shareholders, but there is an inherent conflict between investor returns and consumer prices.

How will the Government, which will be the regulator and 51 per cent owner of Mighty River Power, reconcile these conflicts?

How do opponents of asset sales reconcile the conflict that Mighty River Power should remain in full Government ownership because its dividend will continue to increase - but that this may require further electricity price rises?

Finally there is the effect of retail incentives on "flipping" or the selling of shares after listing.

Delayed bonus schemes are the most popular form of retail incentive, because they discourage flipping immediately after shares list on a stock exchange.

Flipping increases immediately after the bonus shares are issued, but there is more long-term loyalty among shareholders who receive retail incentives than among those who don't.

According to the Helsinki study, 53 per cent of investors with no incentives had sold some or all of their shares at the bonus expiration date compared with 16 per cent who were entitled to the bonus.

One thousand days after the IPO 73 per cent of investors with no incentives had sold, against 62 per cent of those receiving bonuses.

As the Key Government has a clear objective to use its partial privatisation programme to boost capital markets, as well as repay debt, it is important that it attracts as many shareholders as possible.

The best way to do this is to have a generous delayed bonus scheme, which is capped on the first $2000 worth of shares bought by individual New Zealanders.

International experience shows that if this is accompanied by media and advertising campaigns, which create awareness about privatisation and the bonus scheme, there will be a huge number of applicants.

A one for eight bonus, capped on the first $2000 invested, would cost $50 million, assuming 200,000 individuals bought Mighty River Power shares.

This is well short of the $500 million quoted in the media this week.

This would be a fantastic outcome particularly as it would discourage flipping by individual shareholders and institutional shareholders would have to buy shares on the market because they may not receive their full application.

This could boost Mighty River Power's share price in the pre-bonus period, and the company's post-bonus share price performance would depend on its profitability, communications and ability to convince its individual shareholders that it has a profitable long-term future. In that sense Mighty River Power would be no different to any other listed company.

Brian Gaynor is an executive director of Milford Asset management.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

Have your say

We aim to have healthy debate. But we won't publish comments that abuse others. View commenting guidelines.

1200 characters left

Sort by
  • Oldest

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on red akl_n3 at 17 Apr 2014 06:01:34 Processing Time: 3134ms