How asset sales went wrong

By Brian Gaynor

Investment


New Zealand's privatisation programme is 12 years old. The Treasury's figures say 40 commercial assets have been sold since 1987, realising $19.1 billion.

The asset sales have generated a fair share of controversy - over the acquisition of New Zealand Steel by Equiticorp, Richard Prebble's dismissal from the cabinet, the sale of a shareholding in the Bank of New Zealand to Capital Markets, the resignation of Jim Anderton from the Labour Party, and the disposal of Telecom to offshore interests.

In recent years Sir William Birch has spearheaded the privatisation programme. He was also the driving force behind the Government-funded Think Big energy projects in the early 1980s. The total loss from these projects was $7.4 billion.

The Government's privatisation programme is more than three-quarters complete. The book value of its unsold commercial assets is only $4.6 billion. This begs the question: have the asset sales been more successful than the disastrous Think Big projects?

The privatisation process was started in February 1987, when 103 million new Bank of New Zealand shares were issued to the public at 175c each.

Although these were new shares, rather than shares owned by the Government, the sharemarket listing of the BNZ is considered to be the first step in the privatisation programme.

It was quickly followed by the issue of 200 million new Petrocorp shares - half to Brierley Investments at 140c, half to the public at 125c. After these issues the Government owned 70 per cent of Petrocorp, while BIL and the public owned 15 per cent each.

The first full privatisation was the sale of the Government's 89 per cent holding in New Zealand Steel to Equiticorp. This sale was announced on October 19, 1987, the day before the sharemarket crash. The Government was issued 92.96 million Equiticorp shares at 352c each. As part of the sale agreement, the Crown had an arrangement to sell them at 352c a share on March 20, 1988.

Despite considerable doubt about the outcome of this arrangement, the Government sold its Equiticorp holding for 352c a share on the agreed date. Equiticorp shares were trading on the sharemarket at only 114c on the same day. As Equiticorp effectively bought its own shares, the group's shareholders and debenture holders suffered a loss of $221 million on the transaction.

After the '87 crash the Government abandoned the partial sharemarket float and adopted the trade sale method of privatisation.

Reasons were:

\EE The public had no appetite for share issues after the crash.

\EE The Government had an unsatisfactory experience with its Equiticorp shareholding.

\EE Continuing problems with the Bank of New Zealand, a partial sharemarket float.

A trade sale is the disposal of a 100 per cent shareholding to the highest bidder in a tender offer. In theory it realises the highest price because the bidder pays a premium for control. A lower price is expected to be realised in a partial sale because no premium for control is included in the price.

The Labour Government concluded several trade sales in 1989 and 1990, including Postbank, Shipping Corporation, Air New Zealand, State Insurance Office and Tourist Hotel Corporation.

Labour experienced considerable internal dissent over its privatisation policies. Prime Minister David Lange sacked Richard Prebble over the Air New Zealand sale and Jim Anderton's resignation from the party was mainly due to the BNZ sale process.

The BNZ was never far from the spotlight. At the end of 1988 the Government rejected a 145c a share offer from BIL for its 87 per cent holding. Six months later the Government gave away its cash issue entitlement to Capital Markets and allowed the merchant bank to buy a 30.4 per cent holding for 70c a share.

Continuing BNZ problems and the sale of 30.4 per cent to a weak partner convinced the Labour Government partial privatisation through the sharemarket was not the right method. When the Telecom sale decision was made in 1990, the trade sale policy was firmly entrenched.

On June 14, 1990 the Palmer Government announced the sale of Telecom to a consortium of investors for $4.25 billion. Finance Minister David Caygill said proceeds would repay overseas debt. The annual net benefit to the Crown would be $227 million, because interest charges would fall by $425 million and Telecom paid a dividend of only $198 million in the March 1990 year.

Richard Prebble, who had been reinstated as Minister of State-Owned Enterprises, was particularly upbeat. He said "the sales process has been extraordinarily competitive and the Government achieved an absolutely top price for the taxpayer."

In retrospect, these comments were incredibly naive. Telecom has paid $5.5 billion in dividends since privatisation and its total value - excluding dividends but including $1.5 billion of capital repayments - has risen from $4.25 billion to $16.6 billion. More than 80 per cent of this $12.3 billion increase in value has gone to overseas investors.

The privatisation of state-owned assets is strongly supported by the business community, but its execution has been totally inept.

By selling 100 per cent shareholdings in state assets, the New Zealand Government has allowed a small group of investors, mainly offshore, to make enormous profits. With just a little foresight these profits could have been kept for the benefit of domestic investors and taxpayers.

In Australia the Government sold 33.3 per cent of Telstra at 340c a share in November 1997. This valued the company at $A44 billion ($67.7 billion).

Telstra's total value has increased by $A61 billion since then and nearly 30 per cent of the increased value has gone to Australian investors and 67 per cent to the Australian taxpayer.

By contrast, overseas investors have captured 82 per cent of the $12.3 billion increase in Telecom's value. Fay/Richwhite/Gibbs/Farmer interests seized 5 per cent, other local investors 13 per cent, and the taxpayer has received nothing.

Telecom reflects the overall sales programme - most of the profits have gone offshore. To summarise the sales:

\EE The 40 asset sales have realised $19.1 billion.

\EE Overseas investors have bought $12.9 billion, or 68 per cent, and domestic investors the remaining $6.2 billion.

\EE These assets had an estimated value of $35.7 billion at the end of August, $16.6 billion above their sale price.

\EE Overseas investors have captured $13.1 billion or 79 per cent of the increase in value and domestic shareholders the remaining $3.5 billion.

One would expect state-owned assets to show a big increase in value after privatisation. Domestic wealth created through privatisation has been one of the reasons why the Australian economy has outperformed the New Zealand economy in recent years. This wealth creation has been a strong contributor to retail sales across the Tasman.

Obviously the trade sale process has serious flaws. The New Zealand Government would have been better advised to maintain its partial sale strategy.

A partial sale of Telecom, similar to the Telstra sale, would have reduced the wealth transferred to overseas shareholders by more than $8 billion and increased the wealth of New Zealand taxpayers and investors by the same amount.

This $8 billion, an effective loss to the New Zealand economy, is greater than the $7.4 billion lost on the Think Big projects.