John Armstrong: Selling asset sales is a hard job even for Key

Prime Minister John Key. Photo / APN

Such is John Key's Midas touch, he could probably sell ice-cubes to Eskimos - and at a premium price.

Selling the merits of even partial privatisations to once-bitten, ever-shy New Zealanders ahead of the November election will be a far tougher test of the Prime Minister's undoubted skills and acumen.

National may have smoothed and soothed the language - "mixed ownership model" sounds far less provocative than "privatisation" and "asset sales", which carry more baggage than that required for Lady Gaga's extravagant wardrobe.

No one is fooled. An asset sale is an asset sale, no matter the anodyne verbiage in which it might now be wrapped.

For once, public sentiment is skewed heavily in Labour's favour. The polls run consistently two-to-one against such sales. The big question is just how deep that antipathy runs.

National is considerably heartened that its post-election intention to float minority stakes in four energy-related state-owned enterprises - electricity generators Genesis, Meridian and Mighty River Power plus coal company Solid Energy - has not provoked more of an outcry.

So far, Labour's campaign against the sales - which also include a downsizing of the Crown's shareholding in Air New Zealand - is lacking the X-factor. It's too predictable. Too pat.

Labour needs to show some mongrel and put the frighteners on a public wondering if the National leopard has really changed its spots and will hold to its promise to retain Government-owned majority stakes in those companies. Or whether the mixed model is an elaborate charade disguising what may be a halfway house to full privatisation.

Labour needs to make merry hell with the foreign ownership bogie - perhaps to a point bordering on xenophobia. As an internationalist, Phil Goff cannot do xenophobia, however. And many in Labour will be grateful for that.

But so too will Key. The Prime Minister has made selling the rationale for the public floats a personal challenge.

Privatisation will remain a dominant, if not the dominant issue through to and during the official four-week election campaign because National and Labour are such polar opposites on the matter.

So far, they're only skirmishing - take the case this week in Parliament as Labour fired questions at Key and Finance Minister Bill English. Labour was trying to tease out what restrictions will be imposed on foreign investors buying shares, both in the floats and through subsequent trading on the stock exchange.

Labour knows it must also win the pivotal argument surrounding the permanent loss to the Crown of dividends from a one-off sale of up to 49 per cent of the shares in each state-owned enterprise.

Here, Labour is going for broke, trying to get such figures as the $732 million that those companies contributed in dividends last year emblazoned in neon.

Labour doesn't mention the obvious: that more than half of that revenue stream would be retained by the Crown. Neither does it point out that the figure was well under $200 million the year before.

While the five-year average is around $530 million, that includes more than $1 billion of one-off special dividends with $600 million coming from the sale of Meridian's Australian subsidiary Southern Hydro.

The Treasury estimates the impact of foregone dividends and retained profits balanced against reduced interest costs to be marginal in terms of the Government's finances.

That gives credence to wider concerns about the poor performance of state-owned enterprises in relation to the size of their equity. Their dividend stream has also been adversely affected by the economic downturn and retaining capital for reinvestment which a cash-strapped Government is reluctant to provide.

National, however, is also reluctant to give too much attention to such failings. It's in a tricky position. It's trying to sell the shares as a good investment. It will also be seeking to maximise the price of the shares to get the highest possible return once the staggered floats get underway after the election.

Striking the right balance also applies to the even more politically volatile question of foreign ownership of shares. The Government isn't saying much about that until it gets advice on the sort of mechanisms it could use to entice small investors to keep their shares.

One such option is a "loyalty bonus" which would give shareholders an entitlement to further shares if they held on to their initial allocation for, say, a year. Such mechanisms are designed to "lock in" shareholdings and deter post-float profit-taking.

One particularly inventive idea mooted in Treasury documents is to distribute some of the shares as KiwiSaver tax credits. That would truly lock in New Zealand ownership, but would probably be too inflexible for the Government's liking.

There are other ways to achieve substantial New Zealand ownership - separate shares for local and foreign investors, residency requirements, ownership caps on foreign entities.

National will be reluctant to go for the latter given its open-door attitude to foreign investment and Treasury warnings that such restrictions will depress the share price.

However, it's equally inconceivable that National will go into the election campaign not having covered this vulnerability which will otherwise be exploited by Labour to the maximum.

Indications are the floats will be open first to small local investors and New Zealand institutions like KiwiSaver providers and the New Zealand Super Fund. Next up will be Australian institutions in recognition of the transtasman equity market.

Only then will foreign investors get a look in. National is confident domestic demand for shares will be high enough to limit foreign ownership to around 5 per cent.

With that kind of mix, National may be able to neutralise concerns about loss of sovereignty.

National's difficulty is that actual ownership patterns won't emerge until the share floats are completed - after the election. National is relying on Key's and English's assurances, that New Zealand's power stations and coal mines won't become subject to undue foreign influence, being convincing enough beforehand.