Analysis: Filling foreigners' pockets

By Brian Gaynor

New Zealand has had a comprehensive privatisation programme since 1987.

Over the past 12 years 40 state-owned commercial assets have been sold, realising $19.1 billion. As at August 31, 1999 these assets had an estimated value of $35.7 billion, $16.6 billion above their original sale price.

The sale process is almost complete because the Government's remaining commercial assets have a book value of only $4.6 billion.

The privatisation programme has been a huge windfall for overseas investors. Just over 79 per cent, or $13.1 billion, of the increase in value has gone to offshore interests.

A list of the biggest winners shows that foreign interests fill the top four spots.

At the top is a combined group of overseas institutions with a net gain of $3.8 billion. Telecom has been the main contributor. In the 1991 Telecom share float - which was initiated by Ameritech and Bell Atlantic - foreign investors were allocated two-thirds of the shares at 200c a share.

Ameritech and Bell Atlantic, the two original Telecom investors, are in second and third place with realised returns of more than $3.2 billion each. These figures do not include their share of Telecom's $5.5 billion of dividend payments since privatisation. Ameritech's return is higher by $150 million because the Chicago-based company sold its shareholding at a higher price than Bell Atlantic.

National Australia Bank, which bought Bank of New Zealand, is next in line. It is sitting on an estimated gain of more than $2 billion after buying at a cut-rate price in 1992.

New Zealand investors, including institutions and individuals, are in fifth spot. They have participated in these floats and share sales:

• Bank of New Zealand and Petrocorp - new shares were issued to the public by these Government-owned companies.

• Telecom, Air New Zealand and Tranz Rail - the new owners of these privatised companies sold shares to domestic and offshore investors.

• Auckland International Airport, Capital Properties and Contact Energy - the Government sold shares directly to the public.

• The sale of 104.5 million Fletcher Challenge ordinary division shares, 26.1 million forest division shares and 10.4 million Wrightson rights.

The Crown had obtained these shares when Fletcher Challenge exercised a put option associated with its Petrocorp purchase.

The outcome of these share sales has been a net gain to domestic investors of $1.9 billion. This is insignificant compared with the gains made by overseas interests. It is also minuscule compared with the profits realised by Australian investors from their Government's privatisation programme.

Telecom accounts for more than 80 per cent of the domestic investor's profits. Air New Zealand is in second place, followed by Auckland International Airport.

New Zealand investors lost money on the Bank of New Zealand, and at the end of August Tranz Rail was 50 per cent below its 619c issue price. Institutional investors are also well down on their purchase of Fletcher Challenge and Wrightson shares from the Government.

Fletcher Challenge has made an estimated profit of more than $1 billion from its investment in Petrocorp, Rural Bank and the methanol and synfuels plants.

Sir Michael Fay and David Richwhite have realised a total gain of $410 million. This is made up of Telecom ($274 million), Bank of New Zealand ($41 million) and Tranz Rail ($95 million).

Alan Gibbs and Trevor Farmer have realised a larger profit from their Telecom investment because they sold their shares at a higher price than the Fay-Richwhite interests.

Brierley Investments' relatively small gain from privatisation is a reflection of the company's poor performance in recent years. The investment group has recorded a $200 million plus gain on its Air New Zealand holding, a small profit from its investment in Petrocorp and a loss on its Forestry Corporation holding.

The country's premier investment group was outmanoeuvred by overseas investors and a number of New Zealand interests when it came to picking winners from the asset sales process.

Edison International, which bought 40 per cent of Contact Energy at 500c a share, is the only investor sitting on a loss of more than $200 million.

The main objective of the privatisation programme is to repay Government debt, particularly overseas borrowings. On the surface this has been reasonably successful.

Since the asset sales began in March 1987 the total debt has declined from $42.5 billion to $36.0 billion and the public sector's overseas debt has fallen from a high of $26.3 billion in March 1994 to $17.4 billion.

But behind these figures is another story. The sale of assets to offshore interests has led to a huge increase in dividend payments to overseas shareholders. This has a negative impact on the country's current account or balance of payments.

Since privatisation Telecom has paid dividends of $5.5 billion and capital repayments of $1.5 billion, most of which have gone offshore.

These payments compare with estimated interest savings of less than $3.5 billion on the $4.25 billion of overseas debt repayment associated with the Telecom sale.

Offshore dividend payments by former state-owned companies have increased the current account deficit. A current account deficit has to be funded by borrowings and/or the sale of assets. Government debt has fallen since 1989 but offshore borrowings by the private sector have risen by $57 billion.

In the final analysis many of our best and biggest companies have been sold to offshore interests, yet New Zealand's total overseas debt, both private and Government, has risen from $46 billion to $102 billion since the end of 1989.

The privatisation programme, although sound in principle, has had major flaws and wasted opportunities.

• Nearly 80 per cent, or $13.1 billion, of the $16.7 billion increase in value of the privatised companies has gone to overseas investors. This massive transfer of wealth to foreigners, which has had a negative impact on the New Zealand economy, has been facilitated by the Government's sale procedure policy. (This was covered in last Saturday's column.)

• Nearly $8 billion of the $12.9 billion invested by foreign interests has come from companies with long-term investment horizons. This indicates a strong potential to attract direct investment - investment that builds new factories and creates jobs - yet the Government has made little attempt to encourage this sort of foreign investment.

• A number of countries have used, or are planning to use, the proceeds from Government asset sales to promote investment in new, sunrise industries. If carefully organised, this can have a far more positive impact on an economy than a reduction in Government debt.

• Other countries are also putting the proceeds of asset sales into dedicated investment funds which will be used to finance future pension or superannuation liabilities. This has a two-fold benefit: it reduces the drain on the exchequer and stimulates investment markets, particularly the sharemarket.

On a scale of one to 10, New Zealand's privatisation policies score no better than three. Hopefully the next Government - whether National or Labour dominated - will adopt a more sensible and realistic approach to the sale of state-owned assets.

No country can expect to generate widespread domestic wealth if it has a deliberate policy of selling its best assets to foreign investors.