KEY POINTS:
The Government's decision to veto the partial takeover offer of Auckland International Airport by the Canada Pension Plan Investment Board (CPPIB) is a major worry for investors.
The concern is that this was a politically motivated veto and the Government could make further negative decisions if its opinion
poll ratings sag.
Investor confidence in New Zealand isn't robust enough to withstand a further erosion of shareholders' private property rights.
One of the most revealing features of this columnist's stint in the Prime Ministers' Department nearly two decades ago was the huge influence of internally generated political polling.
The Beehive is inhabited by a small number of highly influential political strategists who brief ministers and have a big input into press releases. They become particularly important in the run-up to a general election.
Political strategists do a huge amount of polling to determine the important election issues.
They then play a major role in developing an effective political strategy around the issues identified through polling.
Earlier this year the Labour Government was performing poorly in the polls and its strategists would have been desperate to reverse the trend before voters go to the polls.
In this regard strategic assets are an ideal political issue for a number of reasons. It is an area with strong emotional and nationalistic appeal, the National Party has been vague on the issue and a tough stance in this area doesn't cost the Government from a fiscal point of view.
By comparison tax cuts, boosts to social welfare spending and other major spending projects are much more difficult, and costly, to introduce.
On February 26, Finance Minister Michael Cullen and Revenue Minister Peter Dunne announced that tax legislation would be introduced to ban the use of the tax-effective stapled securities that the CPP was proposing if its 40 per cent offer for Auckland Airport was successful.
Six days later Cullen announced that amendments would be made to the Overseas Investment Act to "assist New Zealand to maintain New Zealand control of strategically important infrastructure on sensitive land".
This press release, which had the politically motivated headline "Strategic assets to be protected in national interest", was more of a pre-election document than a rational attempt to explain why 50,000 shareholders were to be deprived of their private property rights.
The partial bid was successful and the Overseas Investment Office recommended that ministers approve the offer. But Land Information Minister David Parker and Associate Finance Minister Clayton Cosgrove turned down the Canadians on the basis that they were "not satisfied that the proposed investment will, or is likely to, benefit New Zealand (or any part of it or group of New Zealanders)".
The outcome was expected because this was essentially a Labour Party election strategy decision and two junior ministers, with strong political ambitions, are not going to go against the wishes of their senior Cabinet and party colleagues.
Prime Minister Helen Clark was in a similar situation 20 years ago when she was a young and ambitious minister in the David Lange Government. Jim Anderton made a strong public stance against Government asset sales and resigned from the Labour Party. At the time Clark probably didn't want to adversely affect her political ambitions by publicly opposing the frenzied asset fire sale programme initiated by Roger Douglas and Richard Prebble.
Calls for Cullen to identify the other strategic assets will fall on deaf ears because this is a political issue and the Finance Minister wants to keep his cards close to his chest. Labour Party strategists could have decided that the preferred option is for Cullen to interfere only when it is warranted from a political point of view.
For example, any decision regarding a State Grid Corporation of China's offer to purchase Wellington's electricity network will probably be based on political considerations.
Cullen would reduce his options, and create considerable distress amongst a large number of shareholders, if he published a list of the country's strategic assets that cannot be touched.
The worry now is that the Labour Party's recent improvement in the opinion polls, which has been strongly influenced by the Government's stance on Auckland Airport, will reverse and Cullen will be encouraged by his political strategists to take a strong stance on other strategic assets.
Most investors have no problem with accepting clearly defined restrictions on these companies. However there is considerable disquiet when policy decisions are inconsistent, retrospective and mainly driven by short-term political considerations.
There are a number of reasons why a large number of Auckland Airport shareholders believe they have been unfairly treated.
These include:
* The Crown sold its 51.6 per cent Auckland Airport shareholding in 1998 with no indication that it would be subsequently classified as a strategic asset. Winston Peters signed the prospectus as Deputy Prime Minister and Treasurer but now, as the leader of a political party just prior to an election, he is taking a different stance.
* New Zealand investors suffered huge losses from a number of privatised assets including Bank of New Zealand, Air New Zealand, Tranz Rail, forestry assets (through Fletcher Forests) and, to a lesser extent, Telecom. The attractive Auckland Airport offer would have given them the opportunity to recover some of these losses.
* The $1.74 billion offer would have given a huge boost to accepting shareholders and the NZX.
* The Overseas Investment Office, which has the experience and expertise to assess these applications, recommended approval yet two junior ministers, who seem to have limited expertise in this area and wrote unconvincing arguments, turned it down.
* The political interference may make it more difficult to attract strong and independent directors to the airport board. This is a concern because the board hasn't performed particularly well over the past year.
The other major issue is investor confidence and the important contribution that a strong and vibrant stock exchange makes to a free enterprise economy.
The relatively poor performance of the NZX, in terms of new listings and total value, has been a factor in the relative underperformance of the domestic economy. The Auckland Airport decision will be another negative contributor because of its impact on investor confidence.
As the accompanying table shows, the NZX was the worst performing OECD sharemarket, in terms of total value growth, in the decade ended December 31, 2007, and now has the lowest value to GDP ratio. This is partly due to a disastrous Government privatisation programme which has been compounded by the Auckland Airport decision.
Managed funds statistics also paint an unflattering picture. For example, only $9.3 billion, or 14 per cent, of total New Zealand managed funds are invested in the NZX and unit trusts, while a staggering A$573.2 billion, or 42 per cent, of Australian managed funds are invested in the ASX and unit trusts.
Our unwillingness to invest in domestic companies has contributed to the country's decline to 22nd in the OECD GDP per capita rankings.
The Canadians have left New Zealand after being totally confused and frustrated by our inconsistent and politically motivated decision-making process. More and more New Zealand investors may follow suit because other countries offer consistent regulation and are more investor-friendly.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management and his disclosure statement is available on www.milfordasset.com under his profile. Milford Asset Management holds 1.2 million AIA shares on behalf of clients.
bgaynor@milfordasset.com
