Fran O'Sullivan: Has Mixed-Ownership Model got the answer to funding?

Why Mixed-Ownership Models could boost our much-needed infrastructure coffers. Photo / File

COMMENT: It's four years since the National Government completed a raft of partial privatisations raising $4.7 billion which was ostensibly to be used to towards funding new infrastructure.

As I spelt out last week, the $4.7 billion was earmarked in a line called the Future Investment Fund within the overall Consolidated Fund. But with capital recycling a topic du jour in infrastructure circles it's worth looking at the performance of the already partially privatised companies.

Does the Government even need to retain majority ownership of these major listed companies? Or should it pave the way for "club ownership" — through a collaboration of KiwiSaver Funds, NZ Super Fund, ACC and iwi — by selling the residual stakes (or part of them) into long-term New Zealand-only club ownership which is inter-generational? Thus raising billions more dollars towards funding the infrastructure New Zealand desperately needs?

This is a valid point when looking at the performance of the MOM companies (shorthand for Mixed Ownership Model) which were partially privatised.

The previous National Government put its stakes in three large state-owned enterprises: Meridian Energy, Mercury Energy and Genesis Energy on the block.

The Government sold down 49 per cent of the Crown's 100 per cent stake in all three companies — electricity generator/retailers known simply as gentailers — via public floats.

It also divested a 20 per cent stake in the listed Air New Zealand reducing its share of the company to 53 per cent.

A report by TDB Advisory, A Review of the Mixed Ownership Model, examines the performance of the partially privatised companies. Its author, Phil Barry, is a former Director at the Treasury and Advisor at the Department of the Prime Minister and Cabinet.

Barry provided strategic advice and led the implementation of structural change and regulatory reform in significant parts of the New Zealand economy. He is also a member of the International Monetary Fund's panel of Fiscal Experts.

Barry has looked at how the Mixed-Ownership Model worked. Exploring whether it achieved the government's objectives of reducing the public debt; increasing investment opportunities for "mum and dad" investors; and improving the financial performance of the individual firms. This latest paper focuses on the financial performance of the firms.

What Barry has found its that the three gentailers have sported performance gains with average operating earnings for the three mixed-ownership firms increasing by $57m pa (4 per cent) in total (based on the industry standard of earnings before interest, tax, depreciation, amortisation and changes in the value of financial assets — EBITDAF).

The three companies' average return on assets increased from 7.8 per cent to 8.3 per cent.

These estimates compare each firm's average performance in the three years before listing with its average performance in the three years after listing.

Barry says the performance of the companies may have improved more than these estimates suggest as the companies had already begun, in the period immediately prior to their listing, to restructure and improve their performance in anticipation of being floated.

Numerous factors influenced the earnings of the companies over the period, including changing hydrological conditions and lower oil prices.

The key point is the companies' business strategies changed significantly around the times of their listing, with the companies increasing their focus on their core business.

Meridian, for example, sold its stakes in subsidiaries Right House, Whisper Tech and its USA solar business in the lead up to the float and Mighty River withdrew from its offshore geothermal investments in Germany and Chile.

Following listing, the companies also reduced their operating costs and adopted more innovative retail strategies in the face of an increasingly competitive generation and retail market and static electricity demand.

Also of note says Barry is the increase in earnings by the MOMs was achieved without charging higher prices from customers.

Since 2013, the average retailers' component of retail electricity prices has actually fallen slightly in real terms (while overall prices have risen slightly, due to higher charges from the regulated transmission and distribution companies).

Compared to the two 100 per cent privately owned and listed gentailers, Contact Energy and Trustpower, the three mixed-ownership companies made ground, but still remained behind in terms of their return on assets.

Contact and Trustpower grew their earnings more than the three mixed-ownership companies but Barry contends this largely reflected the expansion of two 100 per cent privately owned companies' asset bases, which grew in total by 11 per cent over the period.

Total shareholder returns for the three mixed-ownership companies, at around 20 per cent pa have exceeded the average returns of 7 per cent p.a. of Contact and Trustpower over the period, in part because the listing prices of the mixed-ownership companies were depressed by Labour's NZ Power proposal at the time of the 2011 election.

"On any measure, the three mixed-ownership companies' dividends increased significantly following their listing and their dividends per share became less erratic as investors demanded a stable dividend yield," wrote Barry in a summary note.

"Critically — by one measure — when special dividends from asset sales are excluded, the Crown has received more in dividends on its 51 per cent stake than it did when it owned 100 per cent of the three companies."

Overall, the performance of the mixed-ownership companies has improved, following the sell-down of the government's shares.

This result should not be surprising. It is consistent with the vast majority of overseas studies that have shown that commercial enterprises perform better, on average and over time, under private rather than state ownership.

At the same time, a wider range of "mum and dad" shareholders invested in the mixed-ownership companies, while the government retained control of the companies through its 51 per cent stake.

Further, the sell-down enabled the government to reduce debt, or allocate through its "Future Investment Fund, funds for increased investment in roads, schools and other infrastructure.

Barry takes the point that the current government is not going to move to sell assets in the short term. But he does suggest it may wish to step back and review the experience with the Mixed-Ownership Model.

He suggest that when the government is looking to raise funds to finance some of its infrastructure and other investment plans, that recycling some of its capital is a relatively low-cost option.

Local governments too could usefully consider the lessons from the mixed-ownership model for the wide range of commercial businesses they own. And that community trusts and the larger iwi might ask whether the mixed-ownership model provides insights for them as they look to manage their risks and provide the best returns to their members.

The late Rob Cameron — at that time chair of the Capital Markets Taskforce — drove the concept of the Mixed Ownership Model (MOM) in 2010. Before Cameron died he suggested it was time for the Capital Markets Taskforce to reconvene and have another look at MOM.

If a NZ Inc "club"of KiwiSaver Funds, NZ Super Fund, ACC and iwi bought the Crown's 51 per cent stake in each of the three gentailers not only would capital be released to reinvest in infrastructure but the "NZ Incs"would also gain exposure to good assets.

Something not to be sneezed at when the NZX itself is under pressure through a lack of blue chip stocks.