Govt may sell smaller slice of SOEs

01:11, Feb 16 2012

Finance Minister Bill English says the Government has held talks with some of the state owned enterprises about selling less than 49 per cent of the companies to allow them scope to raise money later.

The Government has said it will sell up to 49 per cent of power companies Meridian Energy, Mighty River Power and Genesis Energy, as well as mining group Solid Energy.

It could cut its stake in Air New Zealand from 75 per cent to 51 per cent.

Speaking at a presentation on the proposed mixed ownership model at Victoria University in Wellington last night, English said once the Government sold 49 per cent of any of the state owned enterprises it would "have to" inject cash into the companies if they needed to raise cash, because by law the Crown would have to maintain its majority stake.

One of the reasons the Government has put forward to support its plan was to give the companies greater access to capital for growth.

"In some circumstances we would have to put more money in. It would be a decision with the companies about whether you sell down the 49 per cent straight away.

"I expect some of the companies will argue that because they've got expansion plans they would rather have a sell down of say 45 per cent so they don't have to come back to the crown for more capital."

English said discussions about selling down less than 49 per cent had already taken place with "a couple" of the board of directors of the companies, although he would not say which ones because "robust external scrutiny" of the plans of the companies would take place before the float.

"The plans might change between now and when they're floated. Even for Mighty River Power that's in the second half of this year and for the others it's into next year, so there's quite a lot of water to go under the bridge yet."

Last night English told an invited audience that the structure of the companies under its proposed model, in which a minority stake will be listed on the stock exchange, was a "win-win".

The Government would be able to shift spending to priority infrastructure without borrowing from international bond markets "the same people who are pushing Greece around".

Meanwhile the public would have a new quality home for their savings, after turning away from finance companies and the "debt fuelled property boom" of the last decade.

In a robust defence of the plans, English said there were flaws in the current structure of the companies, exposing them to political interference and non-commercial decision making.

Energy ministers of the day were not in a position to credibly question spending plans and were unwilling to be responsible for proposed projects. In response the companies hoarded cash to give flexibility, which may not stand up to external scrutiny.

"They don't ask [for money] and we never give any. Government has not injected money into state owned enterprises, except for when they're in trouble, for as long as I can recall," English said.

"We're an odd owner. We've very fond of these entities, we just never feed them and of course they respond to the fact that they know the Government will be very reluctant to put any capital in by retaining as much cash as they possibly can and keeping their debt levels as low as they can possibly get away with.

"There aren't good capital disciplines because the Government's scared to make decisions. What would a minister know about whether the next wind farm is viable? Does he want to be held to account for making that decision? The answer is no, so we just don't make the decisions.

"And on the other hand the companies have had access for too long to too much free cash flow and that obviously gives them the temptation to invest in projects that the market may regard as sub-optimal."

English also took a swipe at critics of the plan to partially sell off, notably the Green Party, which claimed the Government was selling assets with a return on investment of around 18 per cent in recent years as a means to reduce borrowing money, which carries an interest rate of around 4 per cent.

The Deputy Prime Minister said the process would be the best way to establish what the market believed the companies were really worth.

"It will be an opportunity to find out how the market values these future earning streams" of the state owned enterprises, English said.

"If they do believe, as some people say, that these companies make 18 per cent return on their assets, then of course the sale price will reflect that, a fact that has eluded quite a few of the critics."

Lew Evans, professor of economics at Victoria University said the mixed ownership model would place greater scrutiny on the companies and their commercial plans.

"It is the ability to engender much more careful scrutiny into the operations of these companies, not just the operations, but the boards themselves."

Evans said the same ownership model could be used for Transpower, the operator of the national electricity grid, or the New Zealand Superannuation Fund, and that the super fund should not be allowed to own shares in the partially-privatised state owned enterprises.

"That would just be removing accountability one further step."

Andrew Harmos, chairman of the NZX, implored English no ignore advice to list the companies on foreign stock markets.

"The advice you'll get from your bankers is "list it on this foreign market, list it on that foreign market", but you don't need to list anywhere other than New Zealand."