O'Sullivan: Advice you can bank on

By FRAN O'SULLIVAN

The spin doctors excelled themselves yet again by dumping official papers on the controversial issue just one working day before Easter - at a time when anything that smacks of complexity is likely to be cast into the too-hard basket by most news organisations.

The last day of a blissful long weekend is not the optimum time to consider why the Government proposes to invest $78.2 million of taxpayers' cash in New Zealand Post's new bank. But I'll give it a shot anyway.

And when we all return to work this week, I'll lay out more of the in-depth detail so that you can make an informed judgment on the quality of Government decision-making in this affair.

Let's look back to February 20.

That's when the Government announced it had approved NZ Post's plan to establish a new publicly owned bank and would bankroll the proposal with $78.2 million of taxpayers' cash.

After months of skirmishing between NZ Post and the Government, and between Labour Ministers and Alliance Leader Jim Anderton, cabinet ministers announced the controversial bank would go ahead. The only major provisos were that NZ Post must make a final decision to proceed once its establishment plan was in place, and that no Government guarantee, explicit or otherwise, would be extended.

It was public closure after a torrid period which had seen NZ Post chairman Ross Armstrong - a close personal friend of the Prime Minister - accuse National's Jenny Shipley of fiscal treason for leaking part of Cameron & Company's confidential appraisal of NZ Post's NewBank business case. NZ Post later withdrew legal action against Act's Richard Prebble for leaking further aspects of the Cameron report.

The Government's official advice on NZ Post's proposal had been suppressed, although it was well known within parliamentary circles that questions had been raised. Indeed, the Treasury had been sufficiently confident to tell the OECD last year that the bank was unlikely to proceed.

But the magnitude of the official opposition was not disclosed when the Government unveiled its investment decision.

It was not until April 11 - just one working day before the long Easter Weekend - that the Government finally released official papers showing the Treasury, Crown Company Monitoring Agency Unit and the Reserve Bank had all vigorously opposed the proposal.

The agencies each proposed a range of measures to reduce the Government's risk of losing its multimillion-dollar investment capital. These included enabling NZ Post to fund the investment directly through issuing redeemable preference shares, and pulling together an exit strategy that would mitigate overall losses if the project failed: in effect, selling off the bank's book, or getting into bed with an experienced banking player.

This latter strategy was necessary as the officials clearly believed the commercial case for NZ Post entering the banking market was not compelling, with forecast rates of return being counter-balanced by considerable associated risks.

Last Wednesday, the Cameron Report was also released.

Contrary to NZ Post's line that the report "confirms NZ Post's new bank will be profitable and have competitive advantages through the existing Post Shop network," Cameron & Company's actual conclusion is that the banking project has negative value for NZ Post. The bank's projected profits are "insufficient to compensate for its establishment costs and initial operating losses" is the way NZ Post's consultants put it before their words went through the state-owned enterprise's spin cycle. At issue was the judgment call over NZ Post's ability to persuade enough people to switch from existing banks to underpin the new bank's business.

Cameron & Co could not even rely on NZ Post's initial business model. Its model was flawed, so the merchant bank had to produce its own - not a great omen for a new business.

But despite the official misgivings and Cameron & Co's conclusions, NZ Post was given space to go back to the drawing-board and fill in the gaps with new information to counter the criticisms. As the spin patrollers put it last week, the original business case did not include forecasts for the revenue NZ Post could expect to achieve internationally if it could add banking advice and management to the business of its subsidiary, Transend. The critical question of just what that advice would be worth if the new bank were not making great profits, or if its competitors launched successful strategies to drive it out of business was, however, neglected.

Finance Minister Michael Cullen stressed that the Government was satisfied over NZ Post's response to the risks Cameron & Co had identified. The Government had also sought an assurance that NZ Post would not engage in the riskier corporate banking market and would restrict itself to retail banking.

The final "Go, No Go" decision has been devolved to NZ Post and the establishment board which it is setting up to finalise plans. Cullen's office says no further official advice will be sought over the plan - it is a NZ Post matter now, although, as a precaution, the Government will have some say over which two independent people are appointed to the bank's establishment board.

Don't read this as a vote of confidence in NZ Post's plans - it is simply a standard distancing ploy by Cullen. But the telling aspect is in the cabinet's response to this affair, particularly the positions taken by Cullen and fellow Labour colleague, SOE Minister Mark Burton.

A cabinet memorandum dated June 19 last year noted that the pair, both shareholding ministers for NZ Post, had informed the company that the Government would not support any banking proposal that required a crown capital injection or ongoing support from the taxpayer. The Government's support would be dependent on an acceptable and commercially robust business case being developed.

The official papers disclose the opposite has occurred.

Against official advice, the Crown is investing $78.2 million, and the tenor of the report tendered by NZ Post's consultants, Cameron & Co, illustrates the company's business case is anything but robust.

More to the point, the documents disclose that it is in fact Alliance Leader and Deputy Prime Minister Jim Anderton who has all along been acting as NZ Post's banking promoter - not the two shareholding ministers.

The papers show that Anderton and his office had been in close contact with NZ Post throughout all of last year. Both the papers under the name of Anderton's economic adviser, John Lepper, and those of Armstrong himself disclose confused objectives, mixing economic development motivations and anti-foreign investment sentiment along with the purely commercial motivation of enabling NZ Post to acquire an additional revenue stream to offset diminished returns from its domestic postal business.

The Government has sought to portray its decision to bankroll NZ Post's investment as "commercial," but the papers disclose a different story, affirming Helen Clark's stance that the deal is the price of keeping the political peace with the Alliance.

This is not the basis for good decision-making.