Prof Martin Devlin: Business and the Partial Asset Sales

Business commentators are now starting to reflect upon the business consequences of the government’s decision to delay the first of the partial assets sales until the second quarter of 2013. Rod Oram, writing in the Star-Times of 9^th September comments on the related issues of a glut of electricity generation, a downturn in domestic and industrial power consumption, the possibility of problems with electricity usage at the Tiwai Point smelter, and the downturn in coal imports by China as issues which will have an impact of the value of Mighty River Power (MRP) shares at float. From any prudent investor’s point of view each and all of these issues represent risks which need to be taken into account when deciding whether or not to invest.

But, he could also have included some assessment of the impact of the MRP delay and the options presented to the government by the Waitangi Tribunal, which, if taken seriously, constitute an additional raft of investment risks which possibly exceed those which Oram considers.

On the positive side, electricity generation and distribution in New Zealand should be a sound strategic investment, principally because it is a virtual monopoly and also because it is a strategic industry essential to the day to day functioning of our nation. Apart from one significant generator, Contact Energy, the others are all owned by the New Zealand government, which also owns the National Grid, Transpower. 

In spite of some degree of blatant government nepotism in the appointment of directors to the boards of these companies, by and large the boards appear to do a sound professional job. Governance is not currently an issue in the generators. The electricity industry returns significant dividends to central government coffers annually. So, by any measure, an investment in a principal generating company such as Mighty River Power should be a very good move indeed, should it not? And government retaining a 51% shareholding might, to some, be an additional measure of comfort - after all, if you cannot depend upon the government to look after our national interests, who can you trust? And Government Bonds are said to be the safest of all investments, and used as a base line against which some interest rates and other forms of equities are measured.

A few weeks ago, I for one would have said, “absolutely - no hesitation, I am in”. Since then, however, the risk profile for MRP and similar investments just got a whole lot worse. I refer of course to the Waitangi Tribunal recommendations regarding Maori claims to the ownership of all fresh water in New Zealand. These claims have, due to public outrage, been scaled down somewhat to one of (untested) “property rights”, which are claimed under the ubiquitous Treaty of Waitangi. 

Notwithstanding this shift, the taxpayer-funded Maori Council has threatened to take the government to court to seek an injunction to prevent any sale until Maori interests have been investigated and obviously settled to their satisfaction. (What is this, if it is not a direct threat or challenge to the government’s ability to govern?) Suddenly, the deal is off-at least until April-May next year. What was stated to be absolutely critical to the governments fiscal management programme ( ie floating MRP this year) is now seen to be not quite that important after all. No matter that this delay is estimated to cost the taxpayer an additional $10 million.

Government’s response to the Tribunal has been interesting. It has declined to deal with the ownership of fresh water resources on a pan-Maori basis, preferring to deal with individual iwi on a case by case basis. (A sensible step which avoids it being conned into gifting a whole chunk of the entire electricity system to Maori interests - as was the case in the Sealords fisheries deal some years ago). It has also, (apparently), decided against the Maori Council’s “shares plus” option where Maori would be given parcels of shares in the company, a seat or seats on the board, and reportedly the power of veto over key management decisions.

This bizarre arrangement, if accepted, effectively accords Maori interests a level of preference ahead and above those of any other shareholder-and of course means there will be less income for government from the wider sale as the Maori shares will apparently be a gift. Seats on the board will be another significant issue. One might expect that, with a business the size and value of MRP, any government appointments to the board would comprise directors who have significant experience and the skills to enhance the wealth generation of the company.

Not necessarily so. In New Zealand, one need only consider ethnic and political appointments to a range of governance bodies in the public sector, District Health Boards in particular, (and remember SOEs like MRP are essentially public entities) to appreciate that in many cases, ethnic and political appointees sometimes find themselves completely out of their depth, often lacking in governance experience, financial acumen and industry knowledge. (See especially Modlik, H, 2004 for insight into Maori appointees*).

And it is not only democratically elected bodies either. The Independent Maori Statutory Board, a completely unelected body with no electoral mandate,  established by the present government, has recently announced its intention to spend $300 million of Auckland ratepayers’ money (to which it has no right) insulating Maori homes. It has a $3 million budget met by the Auckland ratepayer. No mandate was sought from ratepayers to establish this “board”.

Then there is the question of to whom would such directors be responsible? Modlik (2004) states that Maori appointees to governance bodies owe their principal allegiance, not to the organisation on whose board they sit, (MRP in this case) but to their constituency (hapu or iwi). If directors are not working primarily in the interests of the company, then dysfunctional governance is bound to follow, with subsequent loss of share value and dividends a real possibility.

Now add to this the right of veto by the said directors over management decisions and we have a recipe for disaster. Given that the principal commodity central to most of New Zealand’s electricity generation is fresh water, then the possible downstream consequences of this questionable option are starkly evident.

If government accedes to this option, there is no way any investor with even an ounce of sense, should invest in MRP, nor in any other such assets, if the above scenarios are enacted.

But wait-there’s more! It didn’t take Maori long (less than a week, actually) to work out that if they can screw the government so effectively on fresh water assets, then the same strategy might work for underground aquifers or, wait for it-the wind. Yes, the wind! Two iwi,  Ngati Kahungungu and Nga Puhi respectively have announced they have made claims to the Waitangi Tribunal for ownership of aquifers, inter alia, and wind. John Key’s immediate knee-jerk reaction? ”Nobody owns the aquifers nor the wind”. We seem to have heard that one before somewhere? Seabed and Foreshore, was it? Or perhaps the ownership of fresh water? Maybe the Radio Spectrum? Or was it all native Flora and Fauna?

It will not be long before we are all paying at least a royalty to the Maori minority for the use of natural resources which are considered to be freely available in most countries around the word. Some wags have even mentioned, in newspaper comments, daylight and the very air we breathe. Not much left after that lot!

*Reference: Modlik, H.K, (2004) Issues Facing Maori in Governance, Public Sector,27,(1),20-23

Professor Martin Devlin has a distinguished career in the fields of education - in business, management, entrepreneurship, and corporate governance - in the private business sector, and in the NZ Army.  He was appointed an Officer in the NZ Order of Merit, ONZM, in the Queen’s Birthday honours in 2011 for services to education. He is a fifth generation New Zealander.