Five gamechangers for our capital markets?

Don Elder, chief execute of Solid Energy. Photo / Supplied

The Capital Markets taskforce believes New Zealand could double the size of its public markets in five years - with a little ambition. Here's some of the potential game changers.

SOEs poised to break out of their capital constraints
Capital Markets taskforce chairman Rob Cameron believes it is possible that state-owned enterprises which require new equity to fund growth initiatives might be allowed to access public capital markets in this Parliamentary term.

Cameron says such a move wouldn't entail a sell-down of the Government's ownership stake but the introduction of the public as an investment "partner" to provide new capital - a step which would seem logical in a fiscally constrained world.

Herald sources suggest that Solid Energy could be the first state-owned enterprise to "partner up" with perhaps the NZ Super Fund and even public investors to enable it to undertake major expansion projects.

It is understood the state-owned mining company has been studying a raft of options to fund projects both on- and offshore.

The various options have emerged after the Government asked SOEs to assess their future capital needs as part of an exercise to constrain the growth of the Crown's balance sheet.

Other potential options are for the public to invest in the offshore expansion of state generators like Mighty River Power and Meridian.

NZX chief executive Mark Weldon says New Zealand dearly "needs" some more quality at-scale businesses for New Zealanders to invest into.

In addition, those businesses should raise private sector growth capital for offshore expansion - not use taxpayer money ("it makes no sense to call a geothermal plant in Chile strategic to NZ, for example").

The Government will, however, have to deal with some political flak to get even these projects over the line.

It is already preparing to investigate options for recapitalising Kiwibank. State-owned electricity transmission agency Transpower is also under scrutiny.

In essence the Government is hopeful that if New Zealanders - who are now more intent on building their own savings and investment in the post-credit crunch era - get the opportunity to buy shares in prime SOEs, they will regard them as blue chip investments.

Particularly, as most of the discussion has so far been around the Government retaining a majority stake and the private equity participation being through non-voting shares.

Buy back our banks? The Aussies still want them
Can't you picture it? That edgy television advertisement where Kiwi actor Sam Neill announces that little old Kiwibank is about to bid for the New Zealand assets of one of the big four Australian banks that are resident here?

Plenty of Aussie-bashing as Kiwibank's fetching young tellers take their chance to interrogate male Australian bankers over what they will be leaving behind in their NZ banks.

That's not quite the picture the Capital Markets Taskforce had in mind when it recommended that the Government explore how it could fill a gap in our public stock market by persuading financial services businesses like the mostly-foreign owned banks to raise equity in our own capital markets.

BNZ, ANZ/National, Westpac and ASB Bank are all owned by big Australian banks, a fact that Kiwibank pushes hard in its advertising campaigns.

But the taskforce clearly believes that New Zealand investors are short-changed by their inability to invest on the NZX in a swag of banking stocks.

A partial listing of Kiwibank would go towards plugging that gap.

But some taskforce members also believe that the Government should instead work with Kiwibank on a long-term strategy that would ultimately result in the bank issuing new domestic capital to fund an expansion into business banking, and, in the longer-term,"buying back" the NZ business of one of the Australian banks.

Westpac chief executive George Frazis reckons there is "no compelling reason" for the Aussie trading banks to issue shares here. Frazis says in Westpac's case it has a very strong capital position in New Zealand and does not face restrictions on marking capital available to grow here.

He suggests that one factor New Zealanders might have overlooked is that it was a big advantage in the post Global Financial Crisis environment for this country to be able to fall back on the strong Australian banks. They are all double-A rated "... there are only 10 globally and four are Australian banks here".

The four majors are also moving to plug the consumer and basic business finance gaps that opened up with the wipeout of the finance companies sector. Finance Minister Bill English got ownership debate on Kiwibank off to a rocky start. But the bank's board has already asked the Government for additional capital.

Trouble is, before any shares are issued to the public - through the bank issuing new capital through non-voting shares to retail investor and institutions - the bank needs to be knocked into shape.

Is John Key's pet financial hub still a go?
The naysayers were quick to take a poke at the Prime Minister when the Australian Government announced it was pressing full-steam ahead with its own plans to create a financial services hub in Australia.

No way New Zealand could hope to compete.

Australia had beaten us to the punch.

But the small taskforce headed by Craig Stobo (its other members include Sam Stubbs, Adrian Orr and Mark Fitz-Gerald) has continued working up its plan which is due to go to Government this month.

The Capital Markets taskforce recommended that the Government should actively pursue the opportunity for New Zealand to develop as an exporter of high-value middle and back offices for Asia- Pacific fund management companies.

International consultants Oliver Wyman - who did the initial investigation - believe New Zealand has a unique advantage for back-office services as it straddles US and Asian time zones.

Since then Key has been sitting on a confidential report suggesting financial services could reasonably swiftly swell into a billion-dollar industry, producing annual tax revenues of $250 million and creating an additional 3000 to 5000 high-paying jobs.

But there is a high risk of failure if the hub "goes live" without major changes to tax and regulatory platforms in place and without a firm commitment already secured from some leading funds to situate their back offices here.

Westpac Institutional Bank chief executive David McLean says the hub proposal is a worthwhile and credible initiative.

"We have many natural advantages (language, workforce, legal system, ease of doing business, ability to find effective solutions more cheaply and with less bureaucracy), and the disadvantages of scale, distance and time zone which are often cited as issues for other industries need not hold us back here. "

But McLean makes the point that New Zealand needs to accept that it is competing with many other countries who have a similar agenda, and have realistic ambitions ("we may not beat India for example but we can and should outperform other jurisdictions closer to our region").

"We must also be prepared if the business case stacks up to actively use incentives - our very pure "build it an they will come" philosophy has been shown not to work."

Westpac chief executive George Frazis suggests that some of major Australian financial institutions could put more back office functions here under the right environment.

Iwi-state enterprises - the new vogue?
Maori economic leaders will target infrastructure, health, telecommunications, housing and prisons as the Government prepares to expand public-private partnerships (PPPs) in its second term.

But the level of investment from the Maori sector, which has assets of more than $16.5 billion, will depend on the ability of iwi to generate cash for acquisitions from their predominantly illiquid balance sheets.

Maori investments, even those of well-heeled Ngai Tahu, tend to be in property which, for tribal and historical reasons, cannot be easily sold or leveraged.

Ngai Tahu chairman Mark Solomon, a member of the Maori Economic Development Taskforce, announced this month that the future lay in Maori investing collaboratively - "iwi katoa", or "all iwi together".

"Individually, iwi are finding their feet - collectively we can stand together and determine our future," he said in a keynote address in Christchurch to iwi and Maori Affairs Minister Dr Pita Sharples.

He said Maori were a logical and enduring partner for the Crown in PPPs. "Perhaps on roads, water, health, and other strategic infrastructure it is not impossible to imagine iwi as cornerstone shareholders in state-owned enterprises, making them state-iwi-owned enterprises. It makes perfect sense if you think about it.

Iwi will have the resources, we want our profits to stay in New Zealand - to reinvest for our people, for New Zealand Inc.

"We are the perfect partner for the Government and they are well aware of our thoughts on the matter. A relationship between the Crown and iwi, as co-investors in national infrastructure, is the next step in the Treaty of Waitangi partnership,"

Solomon said infrastructure was a "good strategic fit" for iwi because it provided investments with a long-term reliable yield, gave iwi influence over the development and management of infrastructural assets and provided iwi with an opportunity to contribute to economic development.

He said Maori had already achieved considerable commercial successes, not least Waikato Tainui and Ngai Tahu.

"Ngai Tahu and Tainui have been doing PPPs infrastructure development for the past 10 years. And in respect of social infrastructure development we [Ngai Tahu] are one of, if not the most, experienced partner in New Zealand."

But he said a large number of Maori incorporations and trusts had been quietly notching up some "brilliant commercial achievements", notably:

Tuaropaki Trust, an amalgam of hapu northwest of Taupo, which had assets of more than $500 million through a diverse portfolio ranging from farming and horticulture to geothermal power generation, satellite communication and a mobile phone network; and

Te Huarahi Tika Trust, which received spectrum allocation and a $5 million treaty settlement in 2000, and was investing in various partnerships with international telecommunications operators. Solomon said the Government understood the value of stability iwi could bring to national growth.

"We are about to emerge as a rising force in Aotearoa."

A fellow member of the Maori Economic Development Taskforce, June McCabe, said the real challenge was to unlock Maori assets to generate cash for acquisitions and investments.

"My focus is really around the equity and how these tribes think about using their current assets as an equity stake and better management of their own solution."

McCabe, a former merchant banker now specialising in governance, leadership and Maori development said the taskforce would next month be publishing a scoping paper covering Maori and capital markets, dealing among other things with the need to attract institutional support for Maori investment.

She said institutions struggled to understand Maori enterprise and were reluctant to lend against collective assets. "At the moment, all the banks are keen to work with Maori but they don't know how to."

Why not have a big agriculture hub? Dairy is already here
NZX chief executive Mark Weldon has big plans to leverage the Kiwi agriculture sector.

He says markets work best when there is a real centre of gravity around an area, not just one product.

The combination of things happening in dairy "make this a real opportunity" for New Zealand.

Weldon makes the point that the Government's earmarked $600 million into agriculture, but has not announced anything for capital markets.

He says while there is no suggestion that it "should", a small amount would potentially change the game for some of these global players, and instead of looking to clear and trade NZ Dairy Futures from the United States, Singapore or Australia they could set up offices here. "This would instantly build local capability, and build a real diversity to the market. It is also an executable idea with real benefit to the NZ corporate sector," Weldon enthuses.

"After all, dairy is 25 per cent of our exports, and having more people service that sector and help them all - from processors to farmers - manage their risk, is in the national interest.

At the centre of the agriculture hub would be a futures market which Weldon believes could grow to four to five times the size of the NZX's listed market, and, also a cash market and capital-raising centre.

He notes that in reality markets grow up around industries (for example the Chicago Board of Trade grew up around the trade in the Midwest, same with the highly successful Futures markets in Brazil around coffee, natural gas, etc).Weldon says New Zealand actually has a real informational advantage, being the "price setter", and there are a number of products in which futures do not really exist (milk, meat, wool) which NZ is strong in. "In addition, with the moves Fonterra are making, we have the opportunity to carve out a set of distinctive models for market-based agricultural co-operatives."

Welson says what Fonterra is doing with its proposed capital restructuring is also significant. The listing of a fund with an economic interest in Fonterra will bring real investment focus to the sector.

The second order effects (price transparency, analysts, etc) will far outweigh the first. "Combine this with the Fonterra Farmers Market, which has a unique structure based around market makers and you will see real liquidity in a 'private garden' market."

There is no reason this model cannot be replicated and/or adapted for other local (or global) agricultural co-operatives.