Whatever NZ Post chair Michael Cullen, or the Government, says about the partial sale of Kiwibank to the “Cullen Fund” and ACC, it is privatisation by stealth.
NZ Super by definition is a terminating fund, set up to ease the financial burden of pension payments that will balloon upward in the next couple of decades. As that happens, the fund must sell its assets.
The deal announced yesterday, to sell 45 percent of the government-owned bank – 25 percent to the Cullen Fund and 20 percent to ACC – will yield $495 million to the owner, NZ Post, but not a cent will be used to inject more capital into the bank to assist its growth and development.
Instead, it will be transferred to the government to shore up its budget, no doubt paying for such smart capital developments as dams for dairy farm irrigation, just as the proceeds of the sale of Meridian, Genesis and Mighty River Power were.
“Kiwibank will remain 100 percent government-owned – that is a bottom line,” Cullen, the former Labour Party finance minister, said.
Kiwibank must have fresh capital if it wishes to compete with the Australian banks, particularly in commercial banking. And because Kiwibank will not receive new capital as part of this deal, NZ Super and ACC will inevitably have to put extra capital in. That will have to come about via the issue of new shares which the cash-strapped NZ Post will be unable to subscribe to, and will therefore have its 55 percent holding further diluted.
Make no mistake; this is still a good deal for NZ Super and ACC.
When NZ Super inevitably sells its shares, as it must, it is obligated to offer the shares back to the government. So when Bill English, presuming he, or his clone, is still Finance Minister in 2030, is offered the Kiwibank shares back at double or triple the price of yesterday’s deal, will he seize this gift-horse? Perhaps, given the economic wizardry he displayed selling power company shares and putting the proceeds into dairy irrigation.
Massey University Banking Prof David Tripe told RNZ ‘s Morning Report that he believed the sale price was more than 40 percent under valuation. He put the market value for the stake at closer to $700 million, valuing the total bank at $1.7 billion rather than the $1.1 billion yesterday’s deal. Such a valuation means when the shares are offered back to the Government, it is even less likely to want to buy them, or be in a position to buy them back.
“In those circumstances, a government would say ‘we haven’t got the money, maybe it should be sold on the open market instead’.”
NZ Super and ACC essentially behave like private equity partners with their investments – they use their strong cash reserves, or even debt funding, to buy cheap assets, and flick those on when there is no longer a good prospective return. When the government is offered the shares back you can guarantee it will not be a good deal for the government.
There is an argument that putting Kiwibank into the NZ Super and ACC’s portfolio, rather the government’s, it will be managed better, but neither of the new owners are specialists in running companies.
They will be looking for a commercial return and Kiwibank will be run as a commercial enterprise. That then raises the question of whether Kiwibank will be any different from the big four Australian bastard banks.
Under yesterday’s deal, Kiwibank will lose its guarantee from NZ Post (essentially the Government) and credit rating agency Standard & Poor’s said that will result in a credit downgrade. So the cost of Kiwibank’s borrowing will rise, particularly if it wants to start raising funds in international markets like the grown-up bank it aspires to be.
That more commercial orientation will result in New Zealanders falling out of love with Kiwibank and public pressure on the government to retain ownership of the bank will diminish. My prediction is that Kiwibank will be Australian-owned within 15 years. It will be just like BNZ.
One side aspect of this deal is that the sale alters how the NZ Super Fund operates in that it is no longer a pure investor as it has been up until now. This is more in line with Labour Party proposals at the last election – to steer NZ Super’s investments towards New Zealand.
“You are in the political public image stage,” one NZ Super insider said. “Inevitably it will get drawn into the political limelight. It does alter the name of the game.”
He called the Labour proposal a crazy idea – the idea of a clean, pure investor was a completely different proposition to a local fund investor. “This is the thin end of the wedge.”
Still, he believes it is a good opportunity for the fund.
“We wouldn’t do it otherwise.”
English says the Government will take a special dividend of “several hundred millions”. The rest will go to pay off NZ Post’s debt and recapitalise the ailing postal “service”. With NZ Post running at a $30 million a year loss, and postal volumes falling off a cliff, the question should be asked about whether NZ Post should be run as a for-profit operation. Do we expect roads, hospitals, the army or schools to run at a profit? Probably National does, but most sane people don’t.
(Simon Louisson formerly worked for The Wall Street Journal, NZPA, Reuters and was most recently a political and media adviser to the Green Party)
Disclosure: the author was one of Kiwibank’s first customers, and a company he part owned was literally the bank’s first commercial customer.