Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: If only National had kept its nerve longer

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Mighty River's share float has brought many new investors on to the market and will net Govt $1.7 billion

Mighty River Power chairwoman Joan Withers, Bill English, NZX CEO Tim Bennett and Tony Ryall congratulate one another during the listing of MRP at NZX. Photo / Getty Images
Mighty River Power chairwoman Joan Withers, Bill English, NZX CEO Tim Bennett and Tony Ryall congratulate one another during the listing of MRP at NZX. Photo / Getty Images

John Key and Bill English must sometimes wonder why National lost its nerve during the 2011 election campaign and muddied the waters on the rationale for selling shares in state-owned companies.

If they had stuck to the original script that had been urged on them by Rob Cameron's Capital Markets Taskforce - use partial privatisations to entice new investors on to the NZX as a step towards their gaining the necessary confidence to invest in more New Zealand-listed companies - the Government would be in a much happier space.

Key and English would have been able to point out that 75,000 of the 113,000 New Zealanders who picked up shares in yesterday's Mighty River Power float were basically new to the game. That many other New Zealanders would also indirectly benefit from the many KiwiSaver funds which invested in the float. That this was all great news as New Zealanders were seeing alternatives to investing in the property market.

The float will still net English a useful $1.7 billion for funding new infrastructure instead of borrowing during internationally straitened times. In next week's Budget, English will likely point out that the Mighty River Power float's $1.7 billion proceeds will go into the so-called Future Investment Fund (really nothing more than a line in the consolidated accounts), and itemise the first capital investments that the Government will make in funding new schools, hospitals and the like.

But the Government's advisers are still faced with having to persuade more New Zealanders that investing in the next partially privatised asset to be put on the block is not only sexy (Mighty River Power does after all come with a guaranteed loyalty bonus) but it is a sensible thing for them to do given the fact that bank deposits are producing low returns in the current environment.

This ought not to be a major challenge for New Zealand's capital markets. An enormous amount of cash has been spent on advertising agencies, PR advisers, investment bankers and more to ensure the success of the Mighty River Power float.

But for the entire programme to succeed there needs to be a much more vigorous response to spell out just how these privatisations will aid the development of a vibrant capital market here. And the upside for New Zealand companies when investing on the sharemarket becomes more commonplace. Neither the ministers nor the capital markets professionals can do their work in a vacuum given the constraints they face on promoting shares.

Yesterday English confirmed that he would use next Thursday's Budget to announce the next asset to be partially privatised. Market sources predict this is likely to be Meridian Energy. It is also an open secret that Key wants to see both the Meridian and Genesis Energy floats also carried out this year.

There are two drivers for this.

First, New Zealand is now on the international radar screen. Worldwide there has been a shortage of quality IPOs (international public offerings) of state-owned companies. But there are expectations this will change as a number of cash-strapped governments go down the privatisation route to get their finances under control. Hence, get in now.

Second, Key and English want the major privatisations done and dusted before election year. The theory is that if the partial privatisations are successful this will put the Government in a better space when it comes to the election campaign.

What will be interesting is the degree to which the two other electricity company floats succeed.

Labour and the Greens deserved a political whack for spooking potential investors with their plan to intervene in the electricity market to reduce electricity prices if they become the government following next year's election. But it is debatable to what extent that will put off investors in the future electricity floats. If Mighty River Power shares do well, that may reduce market nervousness on the part of those who decided not to go ahead and buy shares after the Labour/Greens announcement.

National tends to pussyfoot when it comes to the big debates on privatisation.

It's not as if Labour is a political virgin in this area.

Labour launched the biggest privatisation programme in New Zealand's history during the 1980s. And Labour's Trevor Mallard - during his period as SOE Minister in Helen Clark's Government - seriously put forward a proposed programme for major subsidiaries of SOEs to be floated on the NZX to further their expansion offshore as national champions.

Labour gets the importance of privatisation in developing capital markets.

This is what makes Labour's opposition to National's partial privatisation programme look blatantly hypocritical.

During the 2011 election campaign, National said it wanted to sell down assets to realise sufficient cash to enable the Government to fund new public assets "without having to borrow more from overseas lenders and increase interest payments at a time when finances are extremely tight." This is what cash-strapped Governments do when they want to avoid further serious cuts to expenditure or raise income and company taxes.

Next week's Budget is expected to build further on the investment slogans - but putting the development of the capital markets uppermost will pay dividends in the long run.

- NZ Herald

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