Extending the Mixed Ownership Model

The Government intends to sell up to 49 per cent of its shareholdings in the State-owned enterprises Mighty River Power, Meridian, Genesis Energy and Solid Energy and reduce the Crown's current shareholding in Air New Zealand.

Mighty River Power is the first company being prepared for mixed ownership, via an Initial Public Offering, most likely in the third quarter of 2012, subject to market conditions. New Zealanders will be at the front of the queue for shares, and the Government expects New Zealand ownership of the companies will be around 85 to 90 per cent.

Table 2 below outlines the forecast fiscal impacts of the mixed ownership model. The forecast assumption is for total proceeds of $6 billion, which is the midpoint of the estimated range of $5 to $7 billion.

Estimated finance costs are based on average bond yields.Profits include dividends paid in cash to shareholders and earnings that are retained by the company.

Source: The Treasury

The overall fiscal impact of mixed ownership is:

• a reduction in net debt. Proceeds will fund new capital purchases, thereby reducing the Crown's borrowing requirement. Forgone dividends increase net debt but are offset by estimated finance cost savings
• a small reduction in the operating balance before gains and losses. Profits attributable to minority shareholders (forgone profits) reduce the surplus. This is offset somewhat by a reduction in finance costs resulting from the reduced net debt
• a small increase in the operating balance over the forecast horizon. Gains on sales are forecast, reflecting an expectation that sale prices will be greater than the book value of the net assets to be sold.

Over the mixed ownership programme, the forecast finance cost savings exceed the forecast forgone dividends. However, the forecast finance cost savings are less than the forecast forgone profits. This is because State-owned enterprises are expected to act as profitable companies and therefore over time to earn an appropriate commercial rate of return that reflects the risk of owning such companies. In effect, the Crown is exchanging an expected stream of income for a (risk adjusted) equivalent amount of cash now.

Mixed ownership, which is the model under which Air New Zealand currently operates, has a number of benefits, including:

• freeing up capital for the Government to invest in other public assets, without having to borrow to do so
• improving the pool of investments available to New Zealand investors and deepening capital markets
• allowing the mixed ownership companies to access capital and grow without depending entirely on the Government
• allowing for external oversight, which places sharper discipline and more transparency on a company's performance, increasing the incentive for improved performance.

Assumptions

The inclusion of the mixed ownership model in the Treasury's forecasts is on the basis that the policy has been sufficiently progressed to enable reasonable forecast assumptions to be formulated and the Government recently confirmed it would be proceeding with the programme after receiving a mandate by its re-election.

These estimates are based on a high-level set of assumptions spread evenly across the forecast period to ensure the forecasts do not compromise the Crown in a material way in relation to particular sales (as required by the Public Finance Act 1989). The timing of each individual sale and the amount of sale proceeds may differ from these forecasts.