Cameron on Mixed Ownership Model

Rob Cameron writes in the NZ Herald:

And therein lies New Zealand’s problem. The analysis of the Taskforce clearly showed our publicly listed markets lack depth, breadth and, by any standards, are just too small. In Australia just under 80 per cent of the largest 200 companies are listed on the ASX. In New Zealand less than one third of our largest 200 companies are listed.

Measured relative to GDP, the NZX is among the smallest in the developed world. As a ratio of GDP, the market capitalisation of our stock exchange is 0.35. This compares with Australia, at 1.37, Britain at 1.40 and the Nordic countries which vary between 0.85 and 1.30. You have to go searching for former communist countries (such as Hungary) to find ratios as low as ours.

Our sharemarket also exhibits significant “gaps”. Sectors such as utilities, which contain a significant number of large and mature companies, are owned by central government or local authorities which choose not to list and make available for public ownership minority interests in these entities. In this respect New Zealand is an “outlier” within the OECD.

A disproportionate share of our large companies are owned by central or local government, and a relatively small number of these companies have minority public ownership, compared to most other OECD countries. This probably contributes to low household participation in our equity market.

The Government’s mixed ownership programme has the potential to significantly change this picture. It would increase the size of our stockmarket by more than 20 per cent, significantly improving its depth, attractiveness and effectiveness as an engine of growth. It would provide retail investors with a much-improved choice of good quality investment products.

It is a good reminder of one of the reasons the mixed ownership model was recommended by the Capital Markets Development Taskforce.

The listing of these large state-owned enterprises will also improve their performance and efficiency. It imposes capital market disciplines that will keep the boards and management teams of these enterprises focused on producing the best outcomes for their customers and acceptable returns for their owners. It will also constrain governments from interfering in their affairs for “non-commercial” reasons or favouring their “friends”, who lack the required capabilities for the job, with directorships.

It is simply not possible to achieve the required level of transparency, oversight and discipline under 100 per cent Crown ownership.

There is a further benefit of listing. The candidate companies are all capital-intensive businesses likely to be making large investments in the period ahead; for example building new power stations. A listing on the NZX gives these companies access to capital and means the burden for financing these investments can be passed by the Government to public shareholders or, at worst, shared with them.

This will make it easier for our SOEs to expand overseas and start earning export dollars.