Rob Cameron: Why mixed ownership model matters

The mixed ownership model has been presented as an initiative to reduce public debt and enable a shift in the Government's investment priorities. Photo / File

Given the political debate surrounding the Government's "mixed ownership model" programme it is hard to imagine there was a time when the initiative received broad-based support from the public and in the media. But there was.

That was at the end of 2009 when it was included as one of the key recommendations of the Capital Markets Development Taskforce. It was presented then as part of a coherent programme to transform New Zealand's capital markets. The rationale for that programme comprised the body of the report - an explanation of how capital markets worked as a "system", why they were a key determinant of New Zealand's economic performance and "prosperity" and how they influenced the achievement of New Zealanders' financial goals.

Since then the mixed ownership model has been presented as an initiative to reduce public debt and enable a shift in the Government's investment priorities. It is not surprising that such a tepid argument has met with growing political opposition and a "yeah, right" response from a large section of the public.

But this is a very important initiative and one that should, once again, receive strong support from the business sector, financial community and the public. Let me explain why.

Capital markets matter: as the Taskforce noted: "Capital markets provide crucial tools for ordinary New Zealanders to achieve financial goals: putting money aside for future spending, withstanding unexpected shocks, growing wealth and enjoying a more comfortable retirement. They are also a major source of funding for our businesses. They enable entrepreneurs to put their ideas into action, and larger companies to grow in international markets, bringing new jobs and higher incomes. If capital markets work well, all these things can happen. If they work poorly, we squander our savings and our talent as a nation".

The diagnosis of New Zealand's capital markets showed that they exhibited shortcomings which produce poor results for retail investors and hamper their role as an "engine of growth" for New Zealand businesses.

Some of the recommendations to address these problems have already been implemented by the Government: consolidating our regulatory agencies, clarifying regulatory objectives, improving enforcement, and reducing tax and other policy biases which distorted savings and investment decisions. The objective of the Financial Markets Conduct Bill, now in the Select Committee process, is to upgrade the regulatory architecture of our capital markets to bring it into the 21st century.

At the centre of all capital markets are the publicly listed equity and debt markets. These provide many of the "quality" investment products savers use to achieve their investment plans. They are also a major contributor to the role capital markets play as an engine of growth. They provide capital for firms to grow and the broad shareholding base large firms require to sustain and support their operations and activities.

A deep, robust, liquid listed market attracts a "cluster" of information, resources and capabilities that is used by private markets and entrepreneurs to get new companies up and running and to support their growth.

And therein lies New Zealand's problem. The analysis of the Taskforce clearly showed our publicly listed markets lack depth, breadth and, by any standards, are just too small. In Australia just under 80 per cent of the largest 200 companies are listed on the ASX. In New Zealand less than one third of our largest 200 companies are listed.

Measured relative to GDP, the NZX is among the smallest in the developed world. As a ratio of GDP, the market capitalisation of our stock exchange is 0.35. This compares with Australia, at 1.37, Britain at 1.40 and the Nordic countries which vary between 0.85 and 1.30. You have to go searching for former communist countries (such as Hungary) to find ratios as low as ours.

Our sharemarket also exhibits significant "gaps". Sectors such as utilities, which contain a significant number of large and mature companies, are owned by central government or local authorities which choose not to list and make available for public ownership minority interests in these entities. In this respect New Zealand is an "outlier" within the OECD.

A disproportionate share of our large companies are owned by central or local government, and a relatively small number of these companies have minority public ownership, compared to most other OECD countries. This probably contributes to low household participation in our equity market.

The Government's mixed ownership programme has the potential to significantly change this picture. It would increase the size of our stockmarket by more than 20 per cent, significantly improving its depth, attractiveness and effectiveness as an engine of growth. It would provide retail investors with a much-improved choice of good quality investment products.

The Taskforce report explains how the strengths and weaknesses in our public capital markets feed off each other to create a "vicious" or "virtuous" dynamic. An initiative of this magnitude has the potential to create a "virtuous circle", where new listings, liquidity, analyst research and investor participation reinforce one another. In fact, it provides a wonderful opportunity to launch an education programme that improves New Zealand's level of financial literacy and facilitates a much broader "ownership" culture among Kiwis.

The listing of these large state-owned enterprises will also improve their performance and efficiency. It imposes capital market disciplines that will keep the boards and management teams of these enterprises focused on producing the best outcomes for their customers and acceptable returns for their owners. It will also constrain governments from interfering in their affairs for "non-commercial" reasons or favouring their "friends", who lack the required capabilities for the job, with directorships.

It is simply not possible to achieve the required level of transparency, oversight and discipline under 100 per cent Crown ownership.

There is a further benefit of listing. The candidate companies are all capital-intensive businesses likely to be making large investments in the period ahead; for example building new power stations. A listing on the NZX gives these companies access to capital and means the burden for financing these investments can be passed by the Government to public shareholders or, at worst, shared with them.

I almost forgot. The programme will also contribute to the reduction in our public debt levels.

For all these reasons, this is an initiative that should be strongly and broadly supported. It is time for the framework and analysis of the Capital Markets Development Taskforce, which proposed the listing of large SOEs as part of a coherent programme to transform our capital markets, to be deployed to motivate support for the MOM.

And whether or not the Government and the Treasury officials who are managing the programme choose to do this, it is now time for leaders in the business and financial sectors to publicly support an initiative that will contribute to the transformation of our capital markets, promote economic performance and prosperity and better enable New Zealanders to achieve their personal financial objectives.

*Rob Cameron is the executive chairman, of Cameron Partners.