OPINION:
In case you haven’t heard, on October 14, New Zealand will be having a general election. And, in an election year, business groups, NGOs, unions and newspaper columnists shine up policies — their so-called “election wish list” — they would like political parties to deliver.
At NZX, we too have a list of initiatives we would like to see implemented — or barriers removed — to lift productivity and help build a stronger, well-functioning economy.
From our perspective, and those in the New Zealand investment and financial services communities, our wish list is more a “must-do list” to help fuel our markets as an engine for growth.
New Zealand needs stable and competitive macroeconomic settings and appropriate regulations. Well-functioning public markets (for example NZX) provide access to capital for those businesses listed on them, but also make it easier for smaller companies to list and grow — freeing start-up private capital for reinvestment in new ideas.
NZX is committed to connecting people, businesses and capital.
Our vision is to be a trusted New Zealand business, delivering sustainable wealth, value and opportunities for all.
The Ministry of Business Innovation and Employment states that New Zealand’s financial markets regulatory system “promotes and facilitates fair, efficient and transparent financial markets”.
Venture capital, private equity and public markets all play an important role in supporting businesses to grow through the various stages of maturity. In many cases, there is overlap, which means it’s incredibly important to ensure the regulatory settings are appropriate, removing inappropriate and unintended favouring. If there is favouring, New Zealand runs the risk of skewing access to opportunities to some investor groups which may result in unintentionally increasing the wealth gap.
To ensure business investment benefits more people in our country (ie democratising access) and is a level playing field, NZX is calling for changes to our public market regulatory settings.
In mid-2008 in response to the Global Financial Crisis, the Capital Market Development Taskforce was set up by the then Labour-led government to look at the state of New Zealand’s capital markets, the international context, future risks and opportunities, and key changes necessary to deliver the best possible financial system for our country.
In 2010 the task force recommended a must-do list of around 60 changes to legislation to allow listed companies to raise capital more easily. Many were implemented by the National-led government of the time.
Fast forward 13 years and we are battling through another global economic downturn. Appropriate “rules of the game” that give investors confidence and allow businesses to access capital effectively and at a low cost are more important than ever. New Zealand needs market settings that are match fit and internationally competitive.
Unlike in 2008, there’s no need to set up a government-led task force — the work has already been done in the form of the Growing Capital Markets 2029 report. That research and its 42 recommendations is still fit-for-purpose. The industry has delivered the recommendations allocated to it. But there are many that require the government to directly implement.
The Budget’s numbers show that as a country we are rapidly increasing our national debt and running some large deficits in the years to come. We need to make some smart choices in the coming years on how we are going to make all the numbers add up. As part of that, public markets can play a significant role in helping to reach the broadest range of investors, efficiently price capital, to ease the pressure on the Government balance sheet and fund the infrastructure required to assist in improving productivity.
That’s why it is important for NZX to outline a “top five must-do list” that requires government input and priority implementation to help lift our nation’s productivity, encourage entrepreneurialism, and help pay for services that directly support our citizens. NZX of course has a more detailed and comprehensive list of initiatives we would like to see introduced. They are a mix of transformative opportunities and more incremental changes.
1. Use of the listed market to support NZ infrastructure and resilience funding.
There is a significant need for base infrastructure and resilience funding and investment in New Zealand and how to most efficiently and fairly pay for it.
Access to private capital and innovative market solutions can help reduce the reliance on government and local government funding and help close the estimated $210 billion infrastructure gap now and into the future.
This would also create further high-quality investible products for Kiwi investors, including potentially through KiwiSaver which is precluded due to lack of liquidity in local government financial products. This could also align with broader sustainable financing and decarbonisation goals.
2. List Government bonds.
NZX recommends listing New Zealand Government bonds on the NZX Debt Market. The benefits would be:
· To maximise the range of investors that can support the New Zealand Government debt programme which will lead to a reduction in the Crown’s borrowing costs over the longer term.
· Capture and stimulate investor demand (through greater prominence and from funds that can only invest in the listed products).
· Support accessing the World Government Bonds Index (WGBI).
Every other comparable country by size of population and/or size of outstanding government debt has their government bonds listed. New Zealand is an outlier by not doing so.
3. To make Prospective Financial Information (PFI) optional in disclosure documents when listing.
One of the most difficult and expensive requirements for a company when listing on the NZX, is prospective financial information or PFI. It is a material factor in why companies are looking to Australia rather than listing in New Zealand.
That is why NZX is proposing to make optional the legal requirements for prospective financial disclosures and full-format prospective statements (together, Prescribed PFI) to be included in a product disclosure statement, for an initial offer of equity securities.
Instead, NZX recommends issuers could provide prospective information that explains the key drivers of the company’s business and forecast outlook, such as trend statements or expectations as to revenue or earnings expressed as a range (i.e. one-year earnings guidance). This information is typically provided by existing listed companies as part of routine periodic reporting.
Doing so will reduce the cost and disclosure burden for listing proportionate to the utility of PFI and ensure a level playing field with ASX while ensuring investors receive better information to make decisions.
New Zealand is an international outlier in relation to its requirements for Prescribed PFI, which is often viewed by companies wishing to list as a significant impediment to the listing. NZX understands the cost of providing ranges from $150,000 to $500,000 and is a factor that may cause New Zealand advisers to recommend companies listed elsewhere where Prescribed PFI isn’t mandatory.
Making this requirement optional would provide investors with more choices of investable products, and enable better access to capital for New Zealand businesses. The change would also ensure New Zealand’s capital markets do not have regulatory settings which are materially less competitive than international peers.
4. Tax relief for Initial Public Offerings (IPOs) on the NZX
NZX is encouraging changes to tax settings to recognise the positive externalities that are created when companies conduct an IPO. It is a costly process but creates broader benefits to the New Zealand economy through access to growth capital and creation of further investible products for New Zealanders.
As such, NZX is supportive of a tax credit for the costs of IPO to not only encourage and reward entrepreneurialism but support a productive economy. It is something the Ireland Stock Exchange, Euronext Dublin, has also proposed.
A secondary or backup measure would be to allow a deduction for the costs relating to secondary capital raising as proposed within the Capital Markets 2029 report.
5. Partial listing of Government Assets.
Partial listings of Government assets could be used to allow Government balance sheet management, freeing up capital for other purposes, while retaining Government control.
The rationale and benefits for considering partial listings are to:
· Enable the Government to retain control of these assets while unlocking capital for other purposes such as spending on public infrastructure like hospitals and schools.
· Reduce reliance on borrowing.
· Increase the overall value of existing assets to the Government.
· Provide dividends for investors.
· Reduce capital expenditure commitments post-listing.
· Potentially create more efficient capital allocation through enhanced governance/disclosure disciplines.
· Create more investable products in New Zealand.
A 2018 independent analysis of the mixed ownership model programme from 2011 to 2014 compared gentailers Mercury, Meridian and Genesis in the three years post-partial privatisation compared to the three years preceding it.
The findings showed significant improvements in dividend distribution, a reduction in capital expenditure, and a lowering of debt-to-earnings and debt-to-equity ratios.
New Zealand and New Zealanders win from a strong economy and well-functioning public markets. Growing Kiwi businesses through transparent and well-supported markets will ensure better and higher-paying jobs, a lift in incomes and an increase in our country’s standard of living. Those outcomes are the ambitions of our political parties.
However, to actually achieve that requires having the right settings in place that encourage and support growth. Doing that will ensure sustainable economic prosperity for a small but determined trading nation at the bottom of the South Pacific.
· Mark Peterson is the chief executive of NZX.
· NZX is an advertising sponsor of the Herald’s Capital Markets Report.
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