KEY POINTS:
Arabs and Canucks don't pass the New Zealand Government's sniff test when it comes to taking a controlling stake in Auckland International Airport.
But with China flavour of the month after this week's signing of the free trade pact, Auckland Airport's board might do worse than approach Beijing
Capital International Airport to take a cornerstone stake in the country's prime gateway.
Airport chairman Tony Frankham and his directors should not be gun shy simply because a year has been wasted in dealing with two unsuccessful approaches: Dubai Aerospace, which shied away after cabinet ministers put up the "Don't invest here" sign, and the Canadian Pension Plan Investment Board, which was denied ministerial approval on Friday.
Beijing Airport, which is run by a Sino-joint stock company, has just opened a spanking new terminal which its architects Foster and Partners have described as the biggest building in the world.
It's also built a useful partnership with Singapore Airport Terminal Services. The upshot is that operations have been incredibly smooth since Terminal 3 opened two weeks ago. I've been through it three times while in China for the free trade deal signing and it's hassle free.
A strategic partnership with a Chinese airport operator would more easily fit the national interest tests set out in Overseas Investment laws and regulations.
Prime Minister Helen Clark, Finance Minister Michael Cullen and Trade Minister Phil Goff would find it difficult to roll out the anti-foreigner rhetoric in the way that they dealt to Dubai Aerospace and the Canadian Pension Plan, given they have just awarded China national treatment in the FTA's investment protocols. China is also a major market that the ministerial trio judges is in New Zealand's interests to pony up to.
The Overseas Investment Office deserves a pat on the back for deciding to recommend the Canadians' application in the face of strong Government disapproval.
The OIO sent a lengthy report to ministers Clayton Cosgrove and David Parker on April 1, which laid out a timetable for their approvals. Under the OIO timetable, Cosgrove (for the Finance Minister) was due to sign his approval on April 3. Parker's approval was expected on April 6. But the junior ministers fell into line with their cabinet superiors.
Helen Clark's Government has taken a pasting from financial market players for rejecting the Canadians' bid. They cynically changed the foreign investment rules midstream to block the Canadians.
But in reality the Canadian Pension Plan's bid was doomed from day one. The OIO report indicates the upshot of the Canadian bid was that overseas ownership of Auckland Airport would rise from 30 per cent to 57.44 per cent as the fund digested its 40 per cent stake.
This is much higher than the 49 per cent foreign ownership limit that John Key says a National Government would apply and would clearly have forced the fund to divest a huge whack of its holding to fall within Key's proposed threshold.
The Canadians did not read the lessons from Dubai's jettisoned bid.
The fund bid $1.752 billion in a partial takeover for 40 per cent of the airport shares, with the knowledge that the Government was opposed to control going offshore.
This was fundamentally a stupid move as the only reason the fund was paying $3.655 a share for its stake was because it needed to offer a control premium to get 40 per cent so it could subsequently stitch up a tax-effective amalgamation with Auckland International Airport that would have enabled it to treble expected returns from its investment to bring down holding costs.
The fund took the view that unless it had 40 per cent, IRD would have likely regarded the amalgamation as a tax rort. The fund then tried to square away the Auckland Airport board and political disapproval by saying it would only vote at the 24.9 per cent level instead of 40 per cent. But it found itself caught in a snare of its own making. As one submitter, whose views would have resonated strongly with ministers, said, "CPPIB intends to restructure the airport's capital structure which will result in significant additional debt on the airport's balance sheet and that this process will have the effect of stripping New Zealand's tax base, putting such a level of debt on the airport balance sheet as to constrain its growth".
The Canadian fund would have been on firmer ground if it had simply stayed in its box by making a straight portfolio investment at under 24.9 per cent.
It would have been entitled to no board seats and no ability to influence operations. But the fund would not have found itself in strife trying to absurdly justify what it brought to the table against OIO rules, which are designed for sensitive land investments not what is basically a stake in a publicly listed infrastructure business.
Judging an overseas investment application for a stake in a listed infrastructure company against rules that were devised to protect iconic New Zealand land and farms does not stand up to rational analysis.
The upshot of the major caveat that the Canadian fund offered to the OIO (despite having 40 per cent of the airport shares it would restrict its votes to 24.9 per cent) meant the OIO had to say it was not known whether the Canadian fund would have sufficient power at board level to add value beyond what was already staked out in Auckland Airport's 20-year master plan.
So the Canadian fund's bid was not able to be positively stacked up against vital national interest tests, such as being able to prove its investment would result in new jobs, or bring new technology to the business or increase export receipts.
Ironically, the ministers' refusal comes when Ottawa is also raising the shutters against major foreign investment. The Canadian fund's failure will not cause a backlash in Canada but it will send a signal to other international investors contemplating major acquisitions in the New Zealand market to do their political homework.
