Capital Markets: Realise assets to fund more infrastructure – Jim McElwain

Jim McElwain argues that New Zealand has a poor and declining record of productivity growth, and asset recycling may be the answer.

THREE KEY FACTS

• New Zealand’s productivity growth is poor, hindering income increases and social infrastructure funding.
• Infrastructure New Zealand highlights a $150 billion pipeline with a $60 billion funding gap.
• Asset recycling, including selling shares in state-owned enterprises, could help fund new infrastructure projects.

New Zealand has a poor and declining record of productivity growth, which inhibits increasing incomes and the ability to fund social infrastructure.

Infrastructure is widely regarded as an enabler to improve productivity. However, as Infrastructure New Zealand notes in its position paper on asset recycling, New Zealand has an upcoming infrastructure pipeline valued at $150 billion but there is a funding gap. Some $60b of this pipeline is yet to have identified funding sources.

Infrastructure New Zealand further notes that if this funding gap was financed solely by debt, that would almost double our debt burden. The level of debt matters because it limits the choices we have in future and the ability to continue to fund the rising demands of New Zealand Superannuation, healthcare and defence. We also need financial flexibility to respond to shocks such as earthquakes and pandemics.

What is asset recycling?

Asset recycling is where a Government (or local authority) sells or leases some of its holdings in an existing asset that it owns to fund the establishment of new assets.

Sell-down of electricity generators and Air NZ

One option to release funds for new infrastructure could be to sell down the Crown’s investments in the three electricity generator/retailers (gentailers), Mercury, Meridian and Genesis, and Air New Zealand. Collectively, the Crown’s 51% shareholding in these four companies listed on the New Zealand sharemarket (NZX) is currently valued at around $13.5b. Every 10% of the total shares on issue sold down by the Crown would release around $2.7b for reinvestment in new infrastructure.

Investment in other state-owned assets that the Crown could consider selling down include Kiwibank, Transpower and Pāmu (formerly Landcorp). The equity that the Crown holds in these three businesses totals some $6b.

Local authority funding pressures

Not only does the Government face budget and balance-sheet pressures and infrastructure deficits, so do local councils.

Auckland Council has recently sold its remaining shares in Auckland International Airport and established a $1.3b Auckland Future Fund. The return on the fund is expected to provide upwards of an additional $60 million a year in cash returns to the council.

Reinvestment of the sale proceeds into a fully diversified portfolio makes great sense, as any local climate or other disaster could adversely impact on the value of the airport shares at the very time that the council would likely need to sell some of its holdings to meet the needs of its community.

Expanded options for KiwiSaver investors

Total KiwiSaver balances at December 31, 2024 amounted to some $122b. A sell-down of the Crown’s holdings in the three electricity gentailers and Air New Zealand would greatly expand the shares available for investment in these companies by KiwiSaver investors and other fund managers.

A possible float of shares in Kiwibank has been raised as a possibility. More shares readily available for investment would facilitate greater trading on the New Zealand sharemarket, thereby making it a more effective platform for other companies to list and raise capital.

Capacity of NZX to support equity raising

Over the last four years, listed companies on the NZX have raised a total of almost $5b a year in sales of new or existing shares. Notable recent equity market transactions have included the Auckland Council’s $1.3b sell-down of its shares in Auckland International Airport and Infratil’s $1.3b equity raising. The market therefore has ample capacity to to absorb a substantial sell-down of the Crown’s holdings in the electricity gentailers and Air New Zealand – where appropriately priced and staged.

Improved performance

The operating and financial performance of companies that are partially or wholly sold down into private ownership could be expected to improve.

In July 2018, TDB Advisory undertook a review of the mixed ownership model, which comprised the sell-down of 49% of the shares in three gentailers by the Crown between 2011-2014.

The study found that as a group, the return on assets rose from 7.8% to 8.3% in the period to 2017. Dividends increased by an average of 69% over the same period and the Crown received more in dividends post-listing on its 51% holding than it did when it owned 100% of the companies.

For New Zealand to achieve the levels of prosperity and social services that we aspire to, then we need to consider all options to fund the infrastructure which enables this. Infinz urges central and local governments to have an open mind when considering the role that asset recycling could play in achieving New Zealand’s potential.

– Infinz is an advertising sponsor of the Herald‘s Capital Markets and Investment report.