Gaynor: Economic progress a costly myth

By BRIAN GAYNOR

Here is an easy question: Have most of our large listed companies originated in the private sector, or in the public sector?

The answer seems obvious; the public sector can't pick winners and most of our successful companies have come from the private sector. This trend has accelerated since Roger Douglas reduced the role of government and transformed the economy.

That is the conventional answer. But stock exchange data shows it is totally incorrect.

As far as the sharemarket is concerned, the importance of public sector companies is increasing rather than decreasing.

Nearly 50 per cent of the market's value is in companies that had their origins in the Government/local authority sector and in the past five years this group accounted for 54 per cent of all equity raised through listings and rights issues.

Over the past 15 years the number of listed companies originating from the private sector has fallen from 271 to 111 and their value has almost halved.

To understand the declining role of private sector companies we need to look at the changing composition of the sharemarket over the past 15 years.

At the end of 1986, just 10 months before the sharemarket crash, there were 271 listed companies with a total value of $42.4 billion. As only one of these, BNZ Finance (a 76 per cent subsidiary of the Government-owned Bank of New Zealand), had its origins in the public sector, nearly all this value was represented by private sector companies.

The New Zealand market was devastated by the October 1987 crash and its total capitalisation fell to just $15 billion at the end of 1990.

The catalyst for its recovery was the listing of Telecom in July 1991. These shares were issued at $2 each and by the end of the year they had risen to $2.60 and Telecom had a value of $6.1 billion, accounting for 23 per cent of the market's total value.

The mid-90s was the peak period for free market policies. Douglas Myers, then chairman of the Business Roundtable, praised the market-oriented reforms in a July 1995 address to the Institute of Directors, quoting a top OECD official who had complimented New Zealand for its spectacular transformation to a free enterprise economy.

Mr Myers said: "Most of us in business today are, for the first time in our lives, part of a successful economy. By and large we have the freedom and the responsibility to run our businesses at international standards of excellence. We have only ourselves to blame if we don't succeed."

Although he had high hopes for the business sector this was not reflected in the sharemarket. Huge resources were being poured into residential housing, particularly in Auckland, and leading businessmen decided that they could obtain richer pickings from the Government's privatisation process.

In the five years to December 1996, 12 former publicly owned assets were listed and the private sector's share of the market's capitalisation fell from 70 to 63 per cent.

In the past five years this trend has accelerated. At the end of June the private sector's share of the market had fallen a further 19 percentage points to 52 per cent and there were only 111 non-public sector companies listed against 271 at the end of 1986.

Telecom and Contact Energy were the biggest new floats in the 90s by a wide margin. Both involved the sale of existing shares rather than the issue of new shares to fund growth.

The total value of the New Zealand sharemarket is still the same as it was in December 1986 and there are now only 128 listed companies, including 10 on the New Capital Market. Fifteen years ago there were 271.

By comparison, the value of the Australian sharemarket has risen from $A137 billion ($170 billion) to $747 billion since 1986 and the number of listed companies from 1134 to 1349.

Privatised companies have made a big contribution to the Australian exchange but they represent a much smaller percentage of total market value. The three largest privatised companies - CBA Bank, Telstra and Qantas - account for just 11 per cent of the market's value compared with 31 per cent represented by Telecom, Contact Energy and Auckland International Airport.

Why has our private sector, particularly the stock market segment, performed so poorly in recent years?

The blunt reality is that the economic reforms of the past 17 years have been too tough on business.

The Government's policies have been consumer rather than business-oriented; there has been a shortage of equity capital; and the Government's privatisation programme has offered much richer pickings for businesspeople.

One of the basic principles of the reforms was to open the New Zealand economy and subject our industries to global competition.

The aim was to force our businesses to become more efficient and to give consumers a wider choice.

This approach was harsh because our trading partners were less willing to lower their trade barriers, particularly in the area of agriculture and the other land-based activities where we have a relative advantage.

The initial response of business was to downsize, cut costs and become lean and mean. As Telecom has demonstrated, this can have immediate benefits for shareholders but cost cutting can have a negative long-term impact.

Some companies have invested and grown but the declining value of private-sector based companies on the stock exchange shows that these have been the exception rather than the rule.

It can also be argued that the Government's monetary policy has been far too one-dimensional. The Reserve Bank mainly focuses on inflation whereas other central banks also take into account the well-being of their countries' business sectors.

A shortage of equity capital has also hindered business growth. Equity investors were devastated by the shenanigans of the '80s and the October '87 crash. They have not returned to the sharemarket because of the poor performance of companies and the inadequate protection offered under our light-handed regulatory regime.

The shortage of capital is self-perpetuating. Companies have to fund their expansion with borrowings. This increases the risk, and the odds of failure, which in turn reduces the availability of equity capital.

The shortage of equity capital has forced the Government to sell its assets to overseas investors and a select number of local investors.

As the privatisation of TranzRail has shown, many of these investors have made big money from the clever recapitalisation of these businesses and not from the creation of true business value.

Having made their money, they have left New Zealand because our unsympathetic economic policies make it difficult for them to start new businesses and achieve an adequate return.

The good news is that a number of leading business groups, including Competitive Auckland, have realised the seriousness of the situation and are developing alternative policies.

Consumer choice is important, but there is a growing realisation that greater emphasis must be placed on encouraging business formation and expansion.

This is a top priority as a stock exchange reflects the strength of a country's business sector. Based on the changing composition of our sharemarket and its poor performance, our business sector is in dire need of resuscitation and rejuvenation.

* bgaynor@xtra.co.nz