The Government's decision to sell a 45 per cent stake in Kiwibank a financially smart one. And its decision to sell it to itself is politically shrewd.

The bank is currently constrained by its capital structure. It needs to grow in order to fulfil its original purpose and bring serious competition to the New Zealand banking market.

As one former bank executive told me recently, it currently achieves the worst possible outcome for those seeking more competition.

Its existence does just enough to placate the regulators and keep the Commerce Commission from the door of the big four Aussie banks. But it isn't strong enough in the market to exert any serious downward pressure on bank margins.


So let it grow, let it grow.

How we do that is the political hot potato. The Green Party would have us fund it directly ourselves with a $100 million cash injection.

I've advocated for a partially-listed model as per Air New Zealand and the power companies. The strong reaction I got to that column confirmed it would be a hard political sell right now.

In the same column, I suggested the full sale of NZ Post but the silence of defenders for the poor old mail service was deafening by comparison with Kiwibank. Clearly New Zealanders feel a passionate sense of ownership in the bank.

With that in mind our ever pragmatic Government has come up with a "third way" solution. It all seems very Singaporean in its approach.

We've sold Kiwibank to ourselves but we are making use of our most financially disciplined institutions -the NZ Superannuation Fund and ACC fund.

Some big issues remain.

By selling it to ourselves we retain all the risk around a growth strategy, whereas there was an opportunity with a listed model to spread that risk.


The Super Fund and ACC are both excellent investment organisations and should provide excellent strategic direction for the bank but as a nation we have a lot riding on them now.

It's not clear that Kiwibank is necessarily the best available investment for them both right now. If we accept a political component to his investment decision then there is a risk of a slippery slope to becoming less financially disciplined.

Left wing critics will worry that it is a path to further privatisation. That would now require a major policy shift from nearly all the major parties.

But the reality is that this does make it an easier move to make.

There's a five-year moratorium, but with Super Fund and ACC input we may eventually see value in raising capital through new share issues.

The Government would get first right of refusal but if it did refuse the market could pick up the stake.

On the Right there will be critics who see this as further evidence of National's slide towards the bad old days of hands-on governing and Muldoonism.

In the end, though, it is encouraging. We have a Government that is still prepared to act on important issues and is prepared to think creatively about how to tackle them.

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