Better Managing Taxpayers' Assets

The Government is determined to get better use out of its existing assets. This means both improving capital disciplines, and redirecting capital to where it is most needed. The Government's balance sheet has trebled in the past 15 years - from $69 billion in 1995 to $223 billion in 2010. In part this growth reflects lack of scrutiny of capital spending, as well as inability to redeploy capital once it is no longer needed.

Our investment will be targeted to priority areas

The Government remains committed to its long-term capital spending programme. The Budget includes a range of new capital spending, mostly focused around improving New Zealand's infrastructure.

Budget 2011 allocates a further $942 million of capital funding to ultra-fast broadband, as Crown Fibre Holdings completes negotiations for the roll-out. This brings the total invested over the past three years to $1.4 billion. A further $28 million has been allocated for ultra-fast broadband in schools.

The Budget includes the second $250 million tranche of the Government's intended $750 million investment over three years as its contribution to KiwiRail's $4.6 billion turnaround plan. An additional $88 million over eight years has been included to complete the upgrade and renewal of the Wellington Metro rail network. The New Zealand Transport Agency (NZTA) continues to invest over $1 billion a year in State highway improvements, including the seven Roads of National Significance and a number of other significant regional projects.

These capital commitments are part of a larger programme of investment in public assets. The Government will increase its assets by a gross total of $78 billion between 2010 and 2015. Some of this extra investment will occur within the State-owned Enterprises (SOEs) and Crown Financial Institutions, but about $21 billion of core Crown funding will be invested in core social infrastructure and student loans.

The Government's objective is to maintain investment in core public assets without increasing debt. This highlights the need for the Government to prioritise where its capital is used, and to redeploy capital, rather than borrow, where possible.

The Mixed Ownership Model

At present, our portfolio of commercial assets presents the greatest scope to change the Government's asset mix. Earlier this year the Government announced it would explore extending the Mixed Ownership Model for some of its commercial assets. This model frees up Crown capital, opens up new investment opportunities, provides the companies involved with wider access to capital and imposes greater transparency and commercial discipline.

The Government believes there is significant merit in extending the Mixed Ownership Model to four State-owned electricity companies - Mighty River Power, Meridian, Genesis and Solid Energy - and reducing its majority shareholding in Air New Zealand.

Meeting the five tests for proceeding…

The Government has decided to seek a mandate to pursue the Mixed Ownership Model for these companies, having been assured the following tests can be met:

• The Government will maintain a majority shareholding stake by owning more than 51% of each company.
• New Zealand investors will be at the front of the queue for shareholdings, and the Government is confident of widespread and substantial New Zealand share ownership.
• The companies involved will provide good opportunities for investors.
• The capital freed up will be used on behalf of taxpayers to fund new public assets and thereby reduce the pressure on the Government to borrow.
• The Government is satisfied that industry-specific regulations will adequately protect New Zealand consumers.

…and taking the policy to the election in November

The Government will take its mixed ownership policy for these companies to the election in November. It will not proceed until it receives a mandate from voters.

In the meantime, the Treasury will undertake preliminary work to prepare for a programme of share offerings in the five companies identified and undertake initial steps to develop a plan for commencing the programme.

Expected proceeds of $5 billion to $7 billion

We anticipate the combined proceeds are likely to be between $5 billion and $7 billion, which could increase the New Zealand sharemarket's capitalisation by up to 10%.

It will also allow the Government to pay for about one-third of the expected increase in core Crown assets over the next five years, without adding to government debt.

We expect implementation of the Mixed Ownership Model across the four energy companies, and a reduction in the Government's majority stake in Air New Zealand, to take place over three to five years from 2012.

Initial public offerings (IPOs) are our preferred method for extending the Mixed Ownership Model.