Overseas investors 'need stability'

Mark Weldon

International investors will refuse to sink cash into New Zealand infrastructure unless the Government brings certainty to the regulation of natural monopolies, says NZX chief executive Mark Weldon.

Weldon said yesterday that "apparent contradictions" between the Commerce Commission's clampdown on power lines firm Vector last week and the Government's directive that regulators should not frustrate infrastructure investment had damaged the country's reputation as an investment destination.

He said: "The market now believes - almost to a person, I believe - that the risk profile of regulatory action, intervention and disagreement is higher than they thought.

"This has two [results]: boards will not make long-term infrastructure investment decisions, which New Zealand absolutely needs. The second is, given the tiny size of the New Zealand market, the rest of the world will not over-think this issue. They will not get into the semantics of it."

Since the commission declared its intention to take control last week, the lines company has lost $400 million from its market value.

Its shares closed down 2c last night at $2.25 - well off its 2005 float price of $2.38.

Weldon's decision to step into the debate follows widespread discomfort with the move on Vector and highlights the risks it is posing to New Zealand's already fragile capital market.

Investors have been spooked by the regulator's action. But their shock has been exacerbated by the timing of the announcement.

Just two days before the regulator declared its intentions, the Government issued a directive - to which the commission was required to "have regard" - that infrastructure companies should have the confidence to invest, that they were entitled to commercially realistic rates of return and that they should have no fear of investment.

This directive - which also reiterated the commission's role in ensuring infrastructure companies were held accountable for their investments and consumers were not disadvantaged by investments - gave Vector's shares a big lift.

Weldon said such swings were unnerving for investors, many of whom had bought Vector's shares in the belief that it would offer steady and stable returns similar to those generated by utilities overseas.

"There needs to be clarification on what the long-term drivers of investment are. Short-term returns and pricing have always been the commission's jurisdiction but drivers of long-term investment need to be clarified.

"The market is concerned and confused by the apparent contradiction.

"The only party that can really sort that out is the Government.

"The commission cannot sort the Government out."

Weldon, however, also criticised the commission directly for its handling of the matter.

"You would certainly prefer that the market had time to digest the announcements and that this was managed in a much less dramatic, much more ordered, much less headline-grabbing way. It could have been a lot more low key.

"Regulators think the world is unchanged by their actions but what people expect of the regulator drives investment behaviour. I am unaware that this is built into any regulatory model."

Meanwhile, the heads of two of the country's largest investment banks yesterday said Vector and the commission needed to work on their relationship.

First New Zealand Capital chief executive Scott St John said: "It is not an issue of the regulators regulating, it is more one of why is the process working like this?"

If large listed companies had such run-ins with regulators, it created surprise and uncertainty for financial markets and inevitably prompted investors to ask why they were investing in this country.

Lance Jenkins, chief executive of Goldman Sachs JB Were, said: "The relationship between regulators and companies cannot be allowed to deteriorate to this extent. There is fault on both sides but the regulator should take into account the stability of the marketplace."