Nzx Open Magazine, Issue One 2007 - "soe's"

2006 2007

PEN

STATE OWNED ENTERPRISES PROTECTING OUR NATIONAL ASSETS OR PREVENTING INNOVATION? ANDREW PATTERSON

HON TREVOR MALLARD

GERRY BROWNLEE

ROB CAMERON

JENNY MOREL

MURDO BEATTIE

HON BILL ENGLISH

PROFESSOR TIM HAZLEDINE

ISSUE ONE 07



PEN 4

SOEs – TAKING THE FEAR OUT OF THE FUTURE Mark Weldon Chief Executive Officer, NZX

8

USING STATE CAPITAL EFFECTIVELY Andrew Patterson Broadcaster, RadioLIVE Business

10 GROWING STATE OWNED ENTERPRISES TO GROW THE ECONOMY Hon Trevor Mallard

Minister for State Owned Enterprises

12 DEVELOPING THE SOE MODEL Rob Cameron & Murdo Beattie Partners, Cameron Partners, Investment Bankers

14 A PRAGMATIC AND GRADUAL APPROACH Gerry Brownlee

National Parliamentary



Spokesperson on State Owned Enterprises

16 NOT A PANACEA Professor Tim Hazledine Department of Economics The University of Auckland Business School



18 GOVERNMENT OWNERSHIP OF BUSINESS ASSETS Jenny Morel Managing Partner, No 8 Ventures Management

20 BALANCING OWNERSHIP WITH PERFORMANCE Hon Bill English Member of Parliament

22 KIWISAVER – POSITIVE FOR NEW ZEALAND’S CAPITAL MARKETS Smartshares

24 NZX MARKET UPDATE





FOREWORD There’s something comfortingly Kiwi about queueing overnight in the freezing cold, wrapped in deceptively chilly acrylic regalia, for tickets to the Big Game. You’ve been a supporter since you can barely remember. You follow the team’s fortunes with fervour. You’re entitled to your ticket, even if it isn’t in the covered section and even if you have to rely on the plasma for most of the action. You’re entitled. If the SOE sector were a home game involving our national side, we’re the ones still shivering overnight in the queue; only this time there’s no hope of securing a seat. The hospitality boxes, with their society shoulder-rubbing and fancy catering, are occupied by representatives of the Crown. The rest of the stadium is empty and echoing. And where are we? We’re waiting at home for the highlights, deprived of the smell of liniment, the smack of scrums and the poetry of the blood bin. The only information we get is relayed, delayed, by a Crown hospitality box occupant. Oh, and when the game gets interesting, most commonly when there’s a fight on the field, the Crown sends one of its top spectators down to wrestle the ref’s jersey from him and swipe his whistle. Are we entitled to more? Read these views and decide for yourself.

Rowan Macrae NZX Communications

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SOEs – TAKING THE FEAR OUT OF THE FUTURE MARK WELDON, CHIEF EXECUTIVE OFFICER, NZX

Part I: SOEs – the need for a national conversation

T

he SOE model has, for the most part, served this country well. There is no appetite for 80’s-style privatisations to be put back on the agenda – nor should there be. Equally, however, the world has changed, and remaining stuck in the politics of the past and ignoring opportunities in this critical area is similarly against the national interest. This paper will outline a new SOE+ model. It represents a necessary update to the current model that reflects today’s social and economic needs but has none of the negatives of 80’s style privatisations. This model is not intended to replace, but augment the current SOE model. Added together with the “Super Sub” model outlined by Trevor Mallard in 2006, we have a spectrum of workable options against which each SOE can be assessed to determine the structure under which each will deliver the best long-term value to New Zealand. As there are a wide spectrum of businesses in the SOE portfolio, this a la carte approach (with full privatisations off the menu) is the optimum approach. Increasing debate on SOEs began last year with the Minister for SOEs, Trevor Mallard, indicating that subsidiaries of SOEs were free to pursue growth plans and opportunities, and if listing was the best way to raise capital to do that, then such subsidiaries were free to pursue that route. Re-opening the national conversation was a bold and positive step, and everybody looks forward to some growth focused SOE subsidiaries coming to market and being available for investment by New Zealanders. For this to be the right option to fuel growth there are some simple factors that must be present. First, the SOE must have an identifiable skill or product set which can fill a meaningful regional or global niche. Second, the skill or product set must make sense on a stand-alone basis.



Around the same time as the Minister made his comments, the New Zealand Institute identified the criticality of offshore growth by New Zealand’s at-scale businesses – specifically SOEs – if we are to address our long term structural issues in the Balance of Payments and other key areas. Simply stated, our largest economic problems can not be solved without addressing the role and goals of SOEs in our economy.

truly global companies. Their current capital structure is a constraint on global strategy. Taxpayer funding and debt runs up against its limits quite soon in a global growth path. Could an SOE make a multi-billion dollar investment in China, for example? Not sensibly under today’s structure. Yet, like Fonterra, some of them should be doing just that as their skills (e.g., renewables) are of huge value in such a market, and offshore monetisation of those skills requires action soon.

Part II: From sunburn to sunscreen Failed SOE privatisations such as TranzRail have so scarred those in the public eye that, to date, the “no more TranzRails” argument has trumped all others. The consequence is that, while it’s clear that the structure and the role of SOEs needs to be refreshed, they have become the big white elephant in our political economy. Logic drove the original design, when creating, corralling and commercialising this country’s assets to protect them from rort and ensure a healthy dividend flow to government was a pragmatic response to what was then a pressing problem. But time, and this country, have moved on and the SOE model hasn’t kept up. For those experiences to provide a rule of thumb for time immemorial lacks logic. It’s like a kid who gets horrendous sunburn never being allowed out in the sun to play again – when really the answer is not avoidance, but care (smother the kid with sunscreen!). The past, and the rhetoric around it, has thus shut down our ability to think critically and innovatively about this area. We must move forward and figure out, for SOEs, what the “sunscreen” solution is. We need to start again by asking the simple question: For New Zealand, what is the best thing we (i.e., our government) can do with each of these businesses? This question requires brave leadership and clear thinking; which is what we expect. The remainder of this article assesses the forces for change, the opportunities, and the “no-fly” zones. It emerges that there are meaningful opportunities for a sensible upgrade – if appropriate – on a case-by-case basis.

Part III: Forces for change to the SOE model The forces for change are compelling, and increasingly urgent. They are as follows: (a) Value creation. A number of our larger SOEs have credible international ambitions, but lack the capital flexibility to pursue them at a time and scale that will achieve the most profitable outcomes. It’s those ambitions that Minister Mallard encouraged them to consider. Some clearly have the skills and capabilities to do so. It’s indisputable that the future value of many SOEs, and the economic fate of New Zealand, depends on some SOEs becoming

“THERE IS NO APPETITE FOR 80’S-STYLE PRIVATISATIONS TO BE PUT BACK ON THE AGENDA – NOR SHOULD THERE BE. EQUALLY, HOWEVER, THE WORLD HAS CHANGED, AND REMAINING STUCK IN THE POLITICS OF THE PAST AND IGNORING OPPORTUNITIES IN THIS CRITICAL AREA IS SIMILARLY AGAINST THE NATIONAL INTEREST.” (b)

Health of the New Zealand economy. SOEs are a major part of the New Zealand economy, representing some of our (unfortunately) very few “at scale” businesses. From the perspective of the structural issues in our Balance of Payments (where the Australian banks alone take out more in profit from the New Zealand economy than all New Zealand companies combined bring back to New Zealand on the investment account), we simply cannot have 15%+ of our economy with a domestic-only focus. Put bluntly, if this model endures the structural imbalances and economic ills that are hindering our growth will only continue to multiply. At the same time, it doesn’t make sense for taxpayers to fund the growth risk of overseas business expansion. Thus, we have a conundrum we need to solve.

(c) Transparency. Having a transparent decision-making structure and process that eliminates politics is important. It would eliminate the challenges and risks the government faces as an owner in the (increasingly frequent) situations when having a political owner is suboptimal for decision-making and accountability. The benefits of continuous disclosure are clear. Any material change in position must be disclosed to the public. As all New Zealanders have a stake in the SOEs, honest disclosure of material matters is in the public interest.



(d) Performance. Many of the SOEs underperform relative to their private sector comparable companies. The focus on dividend, and returns against the book value of assets is misleading. Many commercial SOEs report results that would be unacceptable in a listed environment. A sharpening of performance scrutiny can only be positive, as there will exist incentives to reduce unnecessary fat (while building muscle), and to ensure that THE SOE+ MODEL there is a growth agenda as well as an operating one. THE RESULT OF THIS MODEL IS A LIQUID SAVINGS

INSTRUMENT THAT NEW ZEALANDERS CAN CO-OWN IN A MINORITY FASHION, WITH THE GOVERNMENT ESTABLISHED AS PERMANENT MAJORITY HOLDER WITH SUPERIOR VOTING AND ECONOMIC RIGHTS.

(e) Savings. There’s a growing recognition of New Zealand’s savings problem. KiwiSaver is designed to address this. However, there is a paucity of investments available for New Zealanders to invest into in their their own currency. To build the robustness of the capital market (as important to national welfare as Telecom, but with 1/100th of the attention), including the capital market skill base, scale is required. New Zealanders need an opportunity to be able to co-invest directly alongside the government in our iconic SOE businesses.

(f)

Governance. A publicly listed environment provides many governance benefits to the government. The listed environment would also bring increased disciplines, and attract the highest quality available directors to the candidate pool. Any perception that political appointees are made under the governmentdriven process would diminish.

(g) Cost. Transparency and shareholder votes would replace the function of CCMAU – entailing a material cost saving for government in the Treasury.

Part IV: “Not-negotiables” Out of the previous failures, and from forward thinking, there are a series of factors that must be viewed as “notnegotiables”; and we certainly don’t propose to argue with them. The following factors must all be addressed: (a) Long-term government control. The government should not relinquish full control over the asset they have created. However, there are ways to maintain control under capital structures quite different, and significantly improved, from those that exist currently. (b) Superior rights. The government created the SOEs. As such, under any alternative capital structure, the government deserves long-term entitlements to superior voting and other rights over those who didn’t “create” the company. This isn’t unusual around



the world (e.g., New York Times, and many other companies have a structure where a cornerstone investor determines key strategic decisions that go beyond purely commercial matters). (c) New Zealand owned. It’s also an important element of an ownership culture – and to ensure that there are great jobs and talent retained in New Zealand – that these companies remain in New Zealand. (d) Remove the fear. As growth strategies have to be approved by government, that very fact creates a moral hazard for SOE Boards. As there will never be any political risk for an SOE that does not look to grow overseas, political ownership becomes a constraint – and SOE Boards are implicitly incentivised to keep their heads down and stay quiet. It is critical, under whatever model, that this fear disappears. So these are the issues. Let’s look for an answer.

Part V: Three SOE models: Current, Super-Sub, and SOE+ In the interests of pushing the debate to a solutions focus, and moving beyond the rhetoric, I suggest there are three options to consider that achieve all the above criteria. First, the current model. Second, the “Super Sub” model outlined earlier. The third model is the SOE+ model. It represents an upgrade to the current model along many of the key dimensions identified, but retains the key control and protection rights important to long-term government ownership. Hence the term, SOE+.

THE SOE+ MODEL CLEARLY COULD HAVE A NUMBER OF VARIANTS – BUT THE CRITICAL THING IS THAT THE DETAILS CAN BE DESIGNED TO INNOVATE AND IMPROVE THE EFFECTIVENESS OF THE CURRENT MODEL.

The SOE+ model also provides much better protection against rort than the current model. In particular, under the current model an SOE could be fully sold with nothing more than a change of heart. With a series of embedded mechanisms, companies under the SOE+ structure would be permanently grounded in the New Zealand economy – to our long-term benefit.

THE SOE+ MODEL The model is outlined in some more detail, as the detail matters. Under this model, the government is a permanent controlling long-term shareholder, but capital is raised, a savings instrument for New Zealanders provided, and performance, transparency and governance improved. Share classes and voting rights. There will be two classes of shares: A and B shares. The voting rights allocated to these shares would be: l

Each Class A share of common stock carries one tenth of a vote. These would be issued to the public.

l

Each Class B share carries one vote. These would be retained by the New Zealand government under the SOE Act.

l

Class B shares can never have less than a majority of voting rights. This would be in the SOE Act, and in each company’s constitution with a 99% super majority voting provision including the role of Class B shares.

Voting rights – exceptions. The above voting rights would not apply in three specific areas, when both classes of share would vote together on an equal “one share one vote” basis. These are non-strategic areas, and areas where the skill base of the public, if utilised to the full extent, will result in better decision-making than the government alone. They are: l l

election of directors; matters of executive remuneration (including issuance of stock to executives); and

l

the appointment of an auditor.

Listing. The Class A common stock shares would be listed. IPO. At IPO the government would raise capital by selling common stock to the public for a minority economic stake (e.g. 30%).

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Share Issuance. Any future capital raisings from shareholders must be offered on an equal basis across Class A and Class B shareholders. If the government (Class B) declines to participate economically, its rating and control interests are unaffected. Economic rights of share classes – dividends. The government as founder has a legitimate right to a higher level of economic interest in the capital payments of the company than new shareholders, reflecting the work done establishing the franchise, and the opportunities created by the government’s capital investments over the years. The structure of returns below recognise this.

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l

Class A Common Stock. Each Class A share would receive 100% of all dividends of capital payments made.

l

Class B shares. Each Class B (government) share would be entitled to 110% of the aggregate of all dividends declared on a share of Class A common stock.

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The short story is, we’ve thought about these things and there’s more than one way through any impediments, real or perceived. The motivation must be simply to find a way for New Zealanders to own – directly – some of their country’s core assets, to take on some of the risk and to benefit from the returns, whether these are generated onshore or in the global arena. The choices should be there for SOEs to make, and for New Zealanders to share. SOEs are so important that a constructive debate, not a negative one based on fear, is required.

Investment Statements can be downloaded from the Smartshares websites. Units in the funds have been accepted for quotation by NZX and will be quoted upon completion of allotment procedures. However the Special Division that regulates Smartshares Limited takes no responsibility for the offer.



USING STATE CAPITAL EFFECTIVELY ANDREW PATTERSON, BROADCASTER, RADIOLIVE BUSINESS

R

ecalling the almost comical levels of inefficiency that occurred in many government departments – the forerunners to today’s SOEs – prior to the economic reforms of the 1980s, one realises just how much has changed in New Zealand. Tales of entire railway wagons missing for months and discovered on sidings hundreds of miles from where they were supposed to be were almost part of the nation’s folklore. Little wonder then that many of these organisations had never heard of, yet alone practised, a customer service strategy! SOEs are listed in the First Schedule of the State Owned Enterprises Act 1986 and operate as a commercial business but are owned by the state. But is the modern SOE in need of a makeover? With high profile office space, senior management staff often earning more than equivalent positions in the private sector and an over-supply of communications, marketing and branding specialists the SOE model, in some cases, has actually become a victim of its own success. In other cases some SOEs have been left to pursue incompatible objectives. Take Television New Zealand (TVNZ) as an example. The company is required to both maximise its profitability by producing a dividend for the government and reflect a charter that requires it to broadcast a range of programming that is of



little commercial value. Is it necessary that the state retain a state television broadcaster, or its equivalent in radio? Contestable funding could be made available for all broadcasters to utilise, thereby improving the effectiveness of this funding, while the assets themselves could, if necessary, be owned in partnership with the private sector. Many commentators have highlighted the excesses within TVNZ due to the lack of budget scrutiny and proper controls, an issue that can be identified as a weakness of the SOE model. Governments have long believed that retaining a controlling influence in the media provides them with the equivalent of an insurance policy. In reality this is an increasingly outdated notion. The evidence of the incompatibility of TVNZ’s conflicting goals is also apparent. The organisation is struggling to maintain its identity and its audience as the media alternatives continue to proliferate. This effectively places capital at risk. Consider how much of the value of TVNZ has effectively been eroded in the last decade in terms of its brand equity, loss of revenue – due to falling ratings – and, more significantly, the increased level of competition from other technology providers, particularly pay TV and the internet. Is retention of ownership an effective use of the state’s capital? It’s a question that needs to be asked more frequently.

“WAGES AND SALARIES AT SOEs INCREASED BY $90 MILLION IN THE YEAR TO FEBRUARY 2007. FEW COMMERCIAL BUSINESSES IN THE PRIVATE SECTOR WOULD EXPECT TO SEE SUCH A SUBSTANTIAL JUMP IN THIS EXPENSE IN A SINGLE YEAR.” A range of arguments can be made for consideration of either full or partial privatisation of some SOEs. This would have the advantage of further exposing the SOE to competition and additional market scrutiny, while also allowing the public to have a stake in these organisations. The success of Air New Zealand, while not strictly an SOE, has proven that public/ private partnerships can be successful. There are plenty of other existing SOEs that could be partially privatised, including: l

Vehicle Testing New Zealand (VTNZ): Given that a warrant of fitness can be obtained from many different providers, why does VTNZ continue to be retained in its present form?

l Kiwibank: Could be floated while including a kiwi share that retains its ownership in New Zealand. It is necessary for the state to own this asset outright? l

Kordia – formerly part of TVNZ: Manages the transmission facilities also utilised by the private sector. Surely an obvious candidate for privatisation.

Wages and salaries at SOEs increased by $90 million in the year to February 2007. Few commercial businesses in the private sector would expect to see such a substantial jump in this expense in a single year. The effectiveness of the Crown Company Monitoring Advisory Unit to oversee the performance of SOEs based on a range of commercial performance benchmarks should also be reviewed. Finally some other issues that should be considered: Encouraging SOEs to consider utilising their expertise in offshore markets could provide additional revenues, but currently there is little incentive to do so.

l

More defined goals and establishing benchmark criteria for each SOE that clearly defines its purpose and justification for retaining ownership by the state.

l

Consideration being given to adopting more public/ private partnership models, including the possibility of partial listings, in order to improve the accountability and performance of SOEs.

l Greater accountability for management performance that ensures capital is utilised effectively.

ANDREW PATTERSON

HUGH BURRETT

l

Andrew Patterson presents ‘Sunday Business’ on RadioLIVE between midday and 1pm. Returning to New Zealand in 2006 after six years in Australia, where he worked for ABC Radio in Sydney, he also co-hosts RadioLIVE’s weekday news hour ‘The World at Noon.’ In addition to his time in the media, he has worked in the finance and tourism industries.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.



GROWING STATE OWNED ENTERPRISES TO GROW THE ECONOMY HON TREVOR MALLARD, MINISTER FOR STATE OWNED ENTERPRISES

T

he debate on whether or not SOEs should be sold is over. Philosophical or ideological disputes about the role of the state, and the relative efficiency prospects of enterprises operating under public or private ownership, have been overwhelmed by our experiences with privatisation. It might have been the excesses of the times, but the fact is that the public thinks that under our privatisation experiment, public assets built up over generations were sold too cheaply, assets were stripped from many of them and the government had to step in later with expensive rescue missions, and postprivatisation rationalisation had disruptive social effects. The SOEs that remain are viewed as strategically important and socially and environmentally sensitive. At the last election, only one party (ACT) went into the election without a pledge to hold on to the SOEs, and that party got 2% of the vote. The real question, then, is not if, but how we exercise stewardship over a substantial part of our productive base.

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The SOEs can not be exempt from that transformation agenda or they will drag on the economy as a whole. l

SOEs are not locked into a straightjacket of what they did in the past: they are now authorised (and encouraged) to explore diversification opportunities, as long as that works off their proven competencies and into adjacent products, markets and processes. (We are not after heroics.)

l

Within that agenda, not all SOEs are similarly placed to move beyond their core business: some basic service providers like Transpower will be occupied on the domestic market and on historical functions for as long as anyone can contemplate.

l

The fundamental requirement with the new SOE agenda is a lot more emphasis on accountability and performance monitoring, rather than on different capital market disciplines.

Let me make four basic points.

Which brings me to if, why and how private equity or quasi-equity (preference shares etc.) might engage with SOEs going forward. (The Rob Cameron proposal.)

l The government is determined to ensure that we transform our economy around a higher productivity, sustainable future.

As an owner, the government has responsibilities to protect the value of its assets and here I come to three crucial points.

l None of the SOEs as far as I am aware are capital constrained at the moment. There is no compelling reason to dilute ownership. If the government did seek capital injections, it is better placed to borrow on advantageous terms (using scale, or security) than through public offerings.

HON TREVOR MALLARD

l

l Issues of quasi-equity to “feed the market” (or “deepen” the capital market), would, in effect, be transferring wealth from our population as a whole to those who took up the equity. These are likely to be the better off (the investor community), and ultimately in a global finance market the international investment community. Why would a government reduce the common wealth to effect a regressive wealth transfer? In terms of the operations of SOEs, a dilution of government ownership by whatever means would be very little different from full privatisation. The government would be bound by continuous disclosure obligations, and the rights of the minority owners would severely constrain any moderation of the operations of the companies around broader policy objectives. Specifically: l

The current practice of preparing a Statement of Corporate Intent (SCI) allows shareholders to negotiate with SOEs over balance, priorities and corporate profile and personality. That would have to be transparent during (not just after) the process of negotiating SCIs, and would largely sterilise what is currently a fertile process.

l

The “no surprises” policy allows regular interchange between shareholding ministers and SOEs, but the surprises would then need to be communicated to the market, and are likely to be more extreme when they are.

So where is the potential for SOEs expansion? Rather than trying to muscle in on a piece of a well performing action, private equity needs to try and think of partnering around ventures that can add value to both participants.

Hon Trevor Mallard is Minister for Economic Development and Industry and Regional Development. Trevor also chairs the Economic Transformation Ministers group. He has been Associate Finance Minister since 1999, and has also held the portfolios of Energy, Education, and State Services.

“RATHER THAN TRYING TO MUSCLE IN ON A PIECE OF A WELL PERFORMING ACTION, PRIVATE EQUITY NEEDS TO TRY AND THINK OF PARTNERING AROUND VENTURES THAT CAN ADD VALUE TO BOTH PARTICIPANTS.”

The government has created an opportunity to let the creative juices flow. Last year, I coined the phrase “partner, not plunder” when it came to foreign investment in New Zealand – as a way of retaining and continuing to build on the Kiwi national economic identity. The same goes here.

Both SOEs and potential equity partners can bring special and different skills and capabilities to new ventures. They need not be standard joint ventures. They can involve new companies with either party taking the majority or minority holding. They can be leasing, licensing or franchising arrangements. One notable example occurred in December 2004, when New Zealand Post Limited divested 50% of its subsidiary Express Couriers Limited, to form a joint venture with DHL, part of Deutsche Post. The joint venture has enabled New Zealand Post to leverage the strong DHL and Deutsche Post brands in the domestic and international marketplaces.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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DEVELOPING THE SOE MODEL ROB CAMERON & MURDO BEATTIE, PARTNERS, CAMERON PARTNERS [INVESTMENT BANKERS]

The Underlying Ideas

T

he original objective behind the development of the SOE model was to improve the efficiency of government-owned trading enterprises.

The development of the SOE model recognised that the efficiency with which we used the resources and how these enterprises performed were determined by their: l

Exposure to competitive markets for their products, services and inputs.

l

Control and governance arrangements.

l Interaction with capital markets. Therefore the key elements of the SOE model were designed to: l Expose SOEs’ inputs and outputs to competition by deregulating the markets in which they operated and removing special assistance.

ROB CAMERON

l Adopt a commercial organisational model within the Companies Act framework and based on standard corporate control arrangements such as:

Rob established Cameron Partners in July 1995. With more than 20 years’ experience is recognised as one of New Zealand’s most experienced and skilled investment bankers. Rob has a BCA in Economics with First Class Honours from Victoria University and an MPA (Finance & Economics) from Harvard University. He is a Harkness Fellow, a Hunter Fellow of Victoria University, a member of the Board of Trustees of Special Olympics New Zealand and a member of the Advisory Board for the Victoria University School of Government.

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•

Boards of Directors.

•

The removal of centralised Treasury and SSC controls.

•

Exposing SOEs to the disciplines of capital markets, disclosure, monitoring and contracts as much as possible.

For much of the 1990s, this model was not applied to the SOEs in the way that had been envisaged. Over this period, many of the SOEs were in ‘prepare for sale’ mode. SOE capital structures were tightly reined in, limiting the scope for major strategic decisions. These decisions were essentially deferred and left to ‘the new owner’. More recently, the current government has confirmed that SOEs are in a long term hold environment and there is a renewed commitment to long term government ownership of SOEs. Accompanying this commitment have been progressive changes in SOE governance and control regimes. The changes recognise that what had evolved in the ‘prepare for sale’ period is not going to work in a long term hold environment. The changes also recognised that SOEs are confronted with significant competitive threats and changes in their markets. This is perhaps particularly evident in the electricity sector which, unlike the 1990s, now has no significant overcapacity and major investment decisions are necessary.

The government’s response has been to encourage SOEs to play more actively in their markets and to transfer more decision rights to SOE boards and CEOs in respect of the development and implementation of business strategy and plans, and the associated investment decisions. The greater empowerment of SOE boards and management teams has resulted in transactions and investments by SOEs that would have been highly unlikely to occur under the ‘prepare for sale’ approach. Examples include: l

Meridian’s acquisition and subsequent divestment of Southern Hydro.

l

New Zealand Post’s divestment of 50% of Express Couriers Limited to a joint venture with DHL.

l

Mighty River Power’s gas exploration joint venture with Swift Energy.

l

Genesis Energy’s partnership in two oil and gas developments.

These changes represent a significant evolution of the SOE model beyond the ‘prepare for sale’ approach, and represent steps towards a better model for long term government ownership.

It would bring SOEs much closer to the performance pressure of the listed company environment without compromising Crown ownership and control of SOEs. It would also improve the size and depth of the New Zealand capital markets and widen the range of alternatives available to New Zealand investors. It is also worth noting that such securities were contemplated in the drafting of the initial SOE Act, and are provided for in the Act The government has shown that it can co-exist alongside listed company investors in examples such as Air New Zealand. In that example, the government is able to maintain the monitoring it desires within the constraints of the continuous disclosure regime and Air New Zealand’s purely commercial mandate. It would be straightforward to accommodate existing SOE Act processes alongside listed equity securities. This would sharpen the commercial incentives of SOEs. If there was concern on this point, we note that the SOE Act already has provisions which allow the Minister to explicitly require (and fund) non-commercial activities. The choice about listed equity securities should not be driven by whether SOEs or the government ‘need the money’. The performance monitoring benefits alone are worth pursuing.

“ISSUING LISTED NON-VOTING EQUITY IN SOEs HAS THE POTENTIAL TO SIGNIFICANTLY ENHANCE THE SOE MODEL. IT WOULD ENABLE DIRECT MONITORING AND MEASUREMENT OF SOE PERFORMANCE AND VALUE BY THE EQUITY CAPITAL MARKETS. IT WOULD ALSO SIGNIFICANTLY ENHANCE SOEs’ ACCESS TO CAPITAL AND FINANCIAL FLEXIBILITY.”

l

MURDO BEATTIE

We believe the model can be further improved. In particular there are a number of potential initiatives which could significantly improve the performance measurement and monitoring regime of SOEs. They include: An advisory panel to assist shareholding ministers with assessing board effectiveness and discussing board performance with SOE chairs; and

l Adoption of a best practice information disclosure regime, matching that of publicly listed companies, to facilitate better monitoring; and l Outsourcing regular reporting on the value and performance of SOEs to suitably qualified private sector analysts. l Exposing SOEs to capital markets disciplines through the listing of non-voting equity. Issuing listed non-voting equity in SOEs has the potential to significantly enhance the SOE model. It would enable direct monitoring and measurement of SOE performance and value by the equity capital markets. It would also significantly enhance SOEs’ access to capital and financial flexibility.

Murdo joined Cameron Partners in 1995 from Telecom New Zealand, where he managed Business Development. Prior to joining Telecom, Murdo spent eight years at Fay, Richwhite & Company Limited where, with Rob Cameron, he was a founding member of that firm’s Investment Banking Group. Murdo has an MSocSc with First Class Honours in politics from the University of Waikato.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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A PRAGMATIC AND GRADUAL APPROACH GERRY BROWNLEE, NATIONAL PARLIAMENTARY SPOKESPERSON ON STATE OWNED ENTERPRISES

S

tate owned enterprises are in a mature phase of their development and the emphasis should now be on improving their management to get the best deal for consumers and taxpayers, rather than on making wholesale changes. In some cases this requires minor recalibration to the portfolio of state owned assets or innovation to enhance their performance. National is interested in how the involvement of capital markets and investors may offer market discipline and an external perspective to drive continuous improvement in our SOEs. This is an idea National continues to investigate with the sector to understand where the best opportunities for this approach may lie.

GERRY BROWNLEE Gerry Brownlee (National), Member of Parliament for Ilam, was born and educated in Christchurch. He currently serves as Shadow Leader of the House and his portfolio areas include Energy, State Owned Enterprises and State Services. He is also Chair of the Commerce Select Committee and Chair of National’s Strategy Committee.

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Decisions regarding state ownership depend on the nature of the market in which they operate. In a highly competitive market with few barriers to entry or exit, and where no countervailing social concerns exist, state ownership is a blunt instrument. For example, few would advocate that we should return to the state manufacture of steel or provision of life insurance. Similarly, National considers that there is no compelling reason why the state should own an extensive portfolio of farms, so would be likely to gradually sell a number of Landcorp’s farms. National would, however, make sure that no Treaty or other legal obligations were put in jeopardy before approving any such sales. In substantially imperfect markets, state ownership can be an effective part of a government’s response to ensure sufficient goods and services are supplied at reasonable cost. Transpower, which operates in a monopoly environment, is one example of this and retaining it as an asset of the Crown is a practical approach rather than creating an additional level of complexity in the regulatory environment. State ownership by itself is not enough to ensure consumers get a fair deal and a government must provide clear parameters for SOEs’ behaviour to protect consumer interests; a privately owned monopoly or a state-owned monopoly can engage in rentseeking behaviour.

State ownership, like any private or public ownership structure, has advantages and disadvantages. One advantage is that SOEs provide a revenue stream to the Crown, which mitigates the burden on taxpayers both now and in the future. Consequently, one measure of their success is the financial return they provide, and financial performance of SOEs is something we continue to monitor closely. We have instigated a Commerce Select Committee inquiry into valuation methods for all SOEs, so we can be comfortable about their return on capital performance. State ownership means that entities do not face the same pressure and immediate feedback provided from a capital market that a listed company would face. Thus, they need careful monitoring to provide assurance they are delivering what they are expected to deliver. The recent case of the unacceptable treatment of Folole Muliaga by Mercury Energy highlighted the risk of unaccountable companies disregarding the needs of their customers and the values of the communities in which they operate. The involvement of external investors may be one way to counter both risk aversion and perceived arrogance of some SOEs, lifting performance by encouraging them to seize on opportunities as they arise. National is committed to taking a pragmatic and gradual approach to state ownership of commercial entities, taking into account the growing demand for solid blue chip New Zealand stocks that KiwiSaver may fuel. There are opportunities to improve the quality of service in SOEs and to generate a superior return to taxpayers (as there is across the entire public sector) and National is committed to investigating innovative approaches to realise these opportunities.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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15

NOT A PANACEA PROFESSOR TIM HAZLEDINE, DEPARTMENT OF ECONOMICS, THE UNIVERSITY OF AUCKLAND BUSINESS SCHOOL

T

he six or so decades since the end of World War II have been an era of unprecedented economic prosperity in the world – a whole new age of growth and development, first in the West and now spreading to the huge populations of Asia.

That’s good, but … new ages bring new problems, and we by now have three mega problems to deal with. State owned enterprises (SOEs) are not the magic cure-all for these problems, but they are going to be part of the solution. That might surprise some. SOEs are a hybrid form of corporate organisation, neither “public” nor “private”, and have been criticised as such, from the left and the right side of the political spectrum. Two very great and venerable economists who died last year would make such criticisms. John Kenneth Galbraith (1908-2006) was the prophet of the “new industrial state”, in which giant corporations would dominate, these run by the “technostructure” of professional managers, with little influence from the ostensible owners of the enterprise, so there was no point in the state owning businesses, because ownership no longer gave control over them. Galbraith wasn’t particularly worried about this, because he predicted that the managers would be focused on long-term planning, good corporate citizenship and technical excellence, all of which would contribute to growth and stability in the macro economy. He turned out to be right about the managers gaining control; but seriously wrong about what they would do with it.

TIM HAZLEDINE Tim Hazledine (PhD, Warwick) is Professor of Economics at the University of Auckland and a Research Associate of the Institute for the Study of Competition and Regulation in Wellington. Before returning to New Zealand in 1992 he was a Professor at the University of British Columbia in Vancouver and also served in the T. D. MacDonald Chair in Industrial Economics at the Bureau of Competition Policy, in Ottawa.

16

And from the right, Milton Friedman (1912-2006) ridiculed the idea that corporations had any power at all. Power was external, in the market, which was where it should be. Famously, he affirmed that it would be “fundamentally subversive” for managers to pursue any social goal other than to maximise the returns to their shareholders. This was because, under the competitive market conditions which he believed held sway, narrow profit-maximising behaviour was the only path to efficient and, even, fair outcomes. A corollary of the Friedman position is that anything interfering with markets would hinder the achievement of efficiency. Having the state own enterprises so that their shares would no longer be freely traded on capital markets would be a major such impediment. Well, Milton Friedman had great insights but he too was seriously wrong about something. He was wrong about power being vested only in impersonal market forces. Corporations, especially very large corporations, do have a substantial degree of power over their market environment, which means they can do harm as well as good.

So how does all this tie in to our topic, SOEs? I need now to bring in those three mega-problems I warned about. The first, chronologically, was the remarkable increase in the share of earned incomes taken in taxes, used to finance the growth in the post-war welfare state. Taxes have their reasons, of course, and in terms of the OECD our tax share is not relatively large, but, in terms of the OECD we are not very rich either, and we need to be looking for ways of funding the things we do want our governments to do that take less out of the pockets of ordinary wage and salary earners. The second big problem, which we can now see got underway in the 1970s, is that those earned incomes, pretax, have not grown as fast as they should. This is not just because overall economic growth has slowed, but is mostly because there has been a startling hollowing out of the earned income distribution, with the top five percent doubling or tripling their returns whilst middle incomes have stagnated. This is where Galbraith and Friedman were both so wrong: market forces have not prevented corporations generating huge surpluses, and the goals of the technostructure have not inhibited top management and its advisers from appropriating this. Basically, they have realised that they are running the ship, and have decided to take it somewhere nice for them.

“… NEW AGES BRING NEW PROBLEMS, AND WE BY NOW HAVE THREE MEGA PROBLEMS TO DEAL WITH. STATE OWNED ENTERPRISES (SOEs) ARE NOT THE MAGIC CURE-ALL FOR THESE PROBLEMS, BUT THEY ARE GOING TO BE PART OF THE SOLUTION.”

And now the third, 21st Century problem is of resource scarcity, driving up energy and commodity prices at the margin and creating huge infra-marginal rents for the owners of those resources. I think you can see where this is heading. State owned enterprises, in particular in the resource sector, can retain the resource rents for the public at large (problem 3), and in so doing reduce the demands of income tax (problem 1). And, they can replace the feeble governance mechanisms of the capital markets to limit the extent that corporate wealth can be pillaged from within (problem 2). Of course, SOEs are not a panacea. But they can help.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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GOVERNMENT OWNERSHIP OF BUSINESS ASSETS JENNY MOREL, MANAGING PARTNER, NO 8 VENTURES MANAGEMENT

G

overnment ends up owniing business assets for a number of reasons:

(1)

There is a natural monopoly, such as Transpower, providing one electricity grid to carry power for a number of different power companies. The same logic has been applied to the government buying back the rail track. This is the best argument for government ownership – it side-steps the issues of managing the monopoly in the public interest.

(2) There is a major long term investment required – longer than the private sector is prepared to make at the time – typically for infrastructure which is seen to be essential for the country’s growth. This applied to the initial investment in railways, post, telecommunications, electricity generation and reticulation. These government investments may be a very good idea at the time they are made, but that does not justify ongoing ownership. Taken to an extreme, the government ends up owning the infrastructure of yesterday, such as canals, rather than investing in the infrastructure of tomorrow, such as the internet. Most of the infrastructure that the government has invested in could now be transferred into private ownership. For example, why should the government own three out of four of the power generation companies in New Zealand? (3) For security reasons. Once upon a time an argument was made that the government needed to own a shipping line, the New Zealand Line, or our freight might not be picked up from New Zealand. This clearly proved to be untrue when the shipping line was sold.

18

(4) The ownership of international rights. For example, this is an argument for government ownership of an airline which has landing rights. Other countries manage landing rights among several national airlines. In the case of the butter trade, the government administers New Zealand access rights through commercial companies. It is worth noting there are many essential services which are not provided by government for example the medical testing laboratory services in Auckland. The government does not necessarily need to own assets for any of the reasons above. The SOE model was introduced to apply normal business systems and reporting through appointing commercial boards to government businesses. I had the privilege of serving on the Railways Corporation Board, a commercial board which preceded the SOE model but was very similar. At my first Railways Board Meeting the board was stunned to realise that Railways did not have accrual accounting. Moving to normal accrual accounts was an early advantage of having a commercial board. If the government has a business that is not as well run as it would be in the private sector, then we as taxpayers are not doing well from it – and would be better having that government money applied to other purposes. Private firms get the most out of businesses by gearing them up with debt, forcing the management to make returns to service this debt, and at the same time heavily incentivising management. Both the high debt and the high incentives for management are hard for SOEs to apply because boards appointed by governments become risk averse or do not have the normal risk/return structure. Without true private sector accountability, say

“BOTH THE HIGH DEBT AND THE HIGH INCENTIVES FOR MANAGEMENT ARE HARD FOR SOEs TO APPLY BECAUSE BOARDS APPOINTED BY GOVERNMENTS BECOME RISK AVERSE OR DO NOT HAVE THE NORMAL RISK/RETURN STRUCTURE. WITHOUT TRUE PRIVATE SECTOR ACCOUNTABILITY, SAY THROUGH THE STOCK MARKET, BAD DECISIONS ARE NOT PUNISHED BY THE MARKET AND GOOD BOLD DECISIONS ARE NOT REWARDED.”

through the stock market, bad decisions are not punished by the market and good bold decisions are not rewarded. New Zealand has very underdeveloped capital markets. This is a huge issue for people growing businesses in New Zealand as we simply do not have the good access to funds that companies would have, say, in Australia. Put that together with the large number of businesses that New Zealand has unnecessarily owned by the government – electricity companies, New Zealand Post, Air New Zealand, New Zealand Land Corp, commercially driven TV etc – and there is an opportunity for a virtuous intersection of these two. If we were to move some of these assets to private ownership by partially or fully floating them on the stock exchange we would get more accountability into the businesses at the same time as enriching New Zealand’s capital markets. It is possible to achieve social goals of business ownership in other ways, such as a government subsidy for rural mail delivery or a restriction on the amount of foreign ownership in Air New Zealand. Having more large companies on NZX would be good for capital markets in general: a richer market attracts more investors, who then look at new listings, which is good for venture capital!

JENNY MOREL Jenny Morel is Managing Partner of No 8 Ventures which she founded in 1999. No 8 Ventures is New Zealand’s leading technology venture capital fund manager. They invest in early stage New Zealand technology companies which have the potential to be large and international. For No 8 Ventures, Jenny is Chairman of GNM Limited and a Director of Open Cloud Limited, Argent Networks Limited, VCU Technology Limited and Surveylab Limited. Jenny is Chairman of the Hi-Tech Association which organises the Hi-Tech Awards in New Zealand and is a Trustee of the Jayar Charitable Trust.

19

BALANCING OWNERSHIP WITH PERFORMANCE HON BILL ENGLISH, MEMBER OF PARLIAMENT

G

overnments of today and those in the future face a different set of circumstances than when the SOE model was first introduced some 20 years ago.

With significant government trading enterprises already sold and government debt at prudent levels, the days of wholesale asset sales are gone. They have been replaced by the need to harness skills in balance sheet management, and embrace a wide range of techniques that can marry the public’s desire to retain ownership of remaining assets with the need to maximise performance. The focus of any government should be on getting the best value for taxpayers’ (forced) investments, regardless of the form of these investments. Over time, successive governments have built a solid balance sheet. SOEs form only one, although an important, component of this balance sheet. Growth in financial assets has been rapid – courtesy of the Crown Financial Institutions and the New Zealand Superannuation Fund – but the investment policies that have been pursued by these entities mean that increasingly, the bulk of this investment is offshore.

20

SOEs represent an important taxpayer investment in New Zealand. They occupy key positions in sectors that are critical to the operation of a modern advanced economy. So it’s important that we understand where the SOE model works and where it doesn’t, what entities should or shouldn’t be SOEs, and that we take a flexible, transparent and pragmatic approach that balances ownership with performance. We’ve made no secret of our desire to allow ordinary Kiwis to voluntarily invest in SOEs as a way to provide this balance. l

Ownership and control is retained by government – which is what the public wants.

l

The performance and value of SOEs comes under greater professional scrutiny and disclosure – which is what taxpayers want.

Clearly there are significant broader benefits. Allowing the public a voluntary stake in ‘public’ assets would enhance SOEs’ access to capital and provide a greater degree of financial flexibility. At the same time it allows government to carefully consider whether some of the Crown’s investment in

“ALLOWING THE PUBLIC A VOLUNTARY STAKE IN SOEs WOULD IMPROVE THE SIZE AND DEPTH OF THE NEW ZEALAND SHAREMARKET AND PROVIDE NEW INVESTMENT OPTIONS THEREBY IMPROVING THE QUALITY AND ATTRACTIVENESS OF NEW ZEALAND’S CAPITAL MARKET.”

SOEs could be better used elsewhere, freeing up capital for improving New Zealand’s infrastructure for example. Allowing the public a voluntary stake in SOEs would improve the size and depth of the New Zealand sharemarket and provide new investment options thereby improving the quality and attractiveness of New Zealand’s capital market. It would also focus the mind of those appointing and appointed to SOE boards. Careful and clear sighted application of this SOE model would make expertise the primary prerequisite for appointment. It may encourage a greater flow of talent and experience from the private sector. We believe government should lend its weight to deepening New Zealand’s capital markets. We believe government should offer more opportunities for New Zealanders to develop a savings culture.

Hon Bill English is the Deputy Leader and Finance Spokesman for the National Party of New Zealand. He entered Parliament in 1990 representing the rural electorate of Clutha-Southland. In 1996 he joined the Cabinet as a junior health and education minister. Mr English became Minister of Health in the first MMP coalition government after the 1996 election. In February 1999 he became Minister of Finance and Minister of Revenue. Mr English held the position of Leader of the New Zealand National Party from October 2001 to October 2003 and Opposition Spokesman for Education from October 2003 to November 2006.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

21

HON BILL ENGLISH

Offering opportunities for Kiwi mum and dad investors to voluntarily invest in SOEs achieves both of these important goals.

SMARTSHARES

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KIWISAVER FOR NEW CAPITAL W

ith the announcement by Finance Minister Michael Cullen on the encouraging early take-up rates for KiwiSaver, it’s clear that New Zealanders are getting behind this initiative to kick start their retirement savings. Just five weeks after the KiwiSaver launch, around 92,000 enrolments had been received by Inland Revenue with one third of these being people actively choosing a KiwiSaver scheme provider. These figures are encouraging, especially with the “active choice” enrolments already at the levels Treasury had forecast. There are now 29 scheme providers listed on the KiwiSaver website, all offering a range of investment fund choices to suit KiwiSavers’ lifestyle and savings aspirations. “This is a positive signal that the savings industry in New Zealand recognises the value of the KiwiSaver Scheme and is prepared to commit significant resource to ensuring it delivers what New Zealanders want,” said NZX Head of Market Products Geoff Brown.

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Disclaimer: Smartshares Limited is a wholly owned subsidiary of New Zealand Exchange Limited (NZX) and is the manager of Smartkiwi. Neither NZX nor the Trustee nor any other person guarantees Smartkiwi. Copies of the Investment Statement can be ordered by phoning 0800 80 87 80.

22

NZX’s own subsidiary funds management business, Smartshares, joined the ranks of KiwiSaver providers with the launch of Smartkiwi. “Smartkiwi is a transparent, low-cost scheme that will deliver investors the performance of the New Zealand capital markets and portions of the Australian market,” said Yvonne Davie, Head of Business for Smartshares. Smartshares manage a range of passively managed Exchange Traded Funds (ETFs) that track various indices in the New Zealand and Australian sharemarket. ETFs provide investors with a simple way to access a diverse range of companies with one investment vehicle.

– POSITIVE ZEALAND’S MARKETS “We see KiwiSaver as a great initiative for New Zealanders to maintain a regular savings pattern over the long term. It’s important for people to make the decision first if KiwiSaver is right for them and then to compare what’s on offer. With the government-funded kick start of $1,000, the annual tax credit of up to $1042 per year and the fee subsidy, it should be a fairly easy decision to make,” said Davie. KiwiSaver is positive for New Zealand’s capital markets. Smartkiwi will appeal to New Zealanders who want a clear picture of what they’re investing in and are keen to own a part of New Zealand businesses, thereby actively participating in this country’s economic growth. Because the underlying SmartKiwi funds are invested in Smartshares ETFs, fees can be kept to a minimum. ETFs tend to have lower management fees than actively managed funds because the investment manager only invests in the companies that make up the particular index that it tracks. The decision an investor needs to make is whether they are happy getting the returns the market generates, or whether they want to pay more for potentially outperforming the market. “Another unique feature of Smartkiwi is the ability for employees to join online. A survey conducted last year of people in the 25-49 year age bracket showed that 52% said they had used the internet to access information about a financial product or service. Clearly the internet is becoming a preferred medium to source information and conduct financial transactions and we want to be a leader in that field,” said Davie.

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For further information contact Victoria Kafka in our New Zealand office on: +64 212 477 149 | [email protected]

DISCLAIMER: Smartshares Limited is a wholly owned subsidiary of the New Zealand Exchange Limited (NZX) and is the Manager of Smartkiwi. Neither NZX nor the Trustee nor any other person guarantees Smartkiwi. A copy of the Investment Statement can be found at www.smartshares.co.nz/smartkiwi or by phoning 0800 80 87 80.

23

Performance Matters

SM

NZX

MARKET NZX Operating Metrics – The Monthly Market Update

CAPITAL RAISED

On the first Tuesday of every month the NZX Operating Metrics and a BoardRoom Radio audiocast metrics presentation are released.

HY 2007

YEAR TO DATE

New Equity Raised ($m)

1,488

1,488

New Debt Raised ($m)

1,162

1,162

Total Capital Raised ($m)

2,650

2,650

The NZX Operating Metrics monthly update include total number of trades and total value traded on NZX Markets, NZX Indices performance and total capital raised by both new and existing issuers.

TRADING

HY 2007

The latest NZX Operating Metrics and audiocast are available on the front page of the NZX Website.

HY 2006 (% CHANGE)

Total Number of Trades

309,010

3%

Total Trades <$50k

267,093

3%

2,512

3%

16,850

- 9%

137

- 9%

292,052

4%

16,179

- 7%

NZX Operating Metrics Half Year 2007 – Highlights

Daily Average Trades

l Strong index performance in first half continues – The NZX 50 Index ended the first half of 2007 on 4,234, an 18% increase since the same period last year and a 4.4% increase since the beginning of 2007. The NZX 15 Index is up 20% since the same period last year.

Total Value Traded ($m)

l Equity raising up 116% on same period last year, total capital raised tops $2.5 billion – Total capital raised in the first half of 2007 is up 28% at $2.65 billion year to date, compared to $2 billion at the same time last year.

NZDX Market

l Average daily trades up 3% – Average daily trades up 3% on the same period last year at 2,512, compared with 2,442 for the first half of 2006.

Number of Trades

Daily Average Value Traded ($m) NZSX Market Number of Trades Valued Traded ($m) Number of Trades

13,699

- 7%

648

- 35%

3,259

- 24%

23

- 44%

HY 2007

HY 2006 (% CHANGE)

NZX 15 Index

57%

- 23%

TOTAL

NZX 50 Index

45%

- 17%

129

NZX All Index

43%

- 19%

Valued Traded ($m) NZAX Market Valued Traded ($m)

l Increased demand for market data – Number of NZX Market Data terminals has increased 6% to 9,344, compared with 8,862 at the start of 2007.

LIQUIDITY

HALF YEAR UPDATE – 2007 NZX LISTED ISSUERS NZSX Domestic NZSX Dual Full

2

NZSX Overseas

41

NZDX

52

MARKET DATA

NZAX

27

Primary Data Distributors

Total NZX Listed Issuers

24

236

)

Real Time Data Distributors

20 9,344

U P D AT E INSTALMENT WARRANT TRADING

MARKET CAPITALISATION ($B)

TRADES

CHANGE

VALUE TRADED

5,449

35%

55

HY 2007

HY 2006 (% CHANGE)

% OF GDP

All Equity

$77

13%

46%

NZSX

$77

13%

46%

NZAX

$1

- 20%

N/A

NZX INDICES PERFORMANCE

HY 2007

HY 2006 (% CHANGE)

NZX 50 Index

4,234

18%

NZX 50 Portfolio Index

2,479

14%

NZX 15 Index

7,790

20%

NZAX All Index

1,203

- 7%

NZX SciTech Index

1,407

5%

NZX MARKET – NEW LISTINGS AND CAPITAL RAISED The first half of 2007 saw a record amount of capital raised by both new and existing NZX listed Issuers, up 116% on the same period last year. New equity listings year to date are L&M Petroleum Limited, Xero Live Limited, NZ Windfarms Limited (Transferred from the NZAX Market), MFS Living and Leisure Limited, MFS New Zealand Limited and BurgerFuel Worldwide Limited. SunSeeker Energy Limited recently listed on the NZAX Market, the costeffective growth platform for early stage and high potential companies. The NZDX Market continued its strong run with eight new listings in the first half of 2007 including large debt issues from ANZ, BNZ and Works Infrastructure.

HI-TECH AND THE NZX MARKETS – GROW FROM HOME, GO GLOBAL In November NZX will run a “Technology and the Markets” conference in Wellington to coincide with the PwC Hi-Tech Awards, based in the capital city this year with the theme “Kiwis can fly”. Kiwis can fly and many of our NZX companies have shown this to be true.

SMARTSHARES Funds Under Management ($m) Number of Unitholders

LINK MARKET SERVICES

HY 2007

HY 2006 (% CHANGE)

371

12%

14,818

2%

HY 2007

CHANGE

NZX Listed Issuers

79

4%

Other Instruments

48

- 4%

The New Zealand technology sector is thriving, with around 10,000 biotechnology, information technology and industrial technology companies innovating from New Zealand. It is critical for the companies within this sector to grow internationally, but equally important for New Zealand to retain these companies on our shores. NZX is organising a day long conference to allow companies within the technology sector the opportunity to better understand value and develop strategies for growth. The conference is to provide a communication channel for technology companies needing capital to get their ideas and technology to the world and the investment community that can help get them take flight. The NZX Markets are an ideal platform for growth for New Zealand technology companies, enabling ownership, talent and intellectual property to remain here.

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We have seen technology and talent emerging and we have seen the investor support grow. New Technology listings Xero is the latest addition to the NZX SciTech Index, which tracks the performance of 25 NZX Listed biotechnology, industrial and information technology companies. The NZX SciTech companies are, in the words of Rod Drury, “United by a passion to develop world class technology to participate in the global economy, and create value for New Zealanders,” and there is room for more Hi-Tech talent to join them.

NEW GLOBALVISION TRADING SYSTEM FOR NZX MARKETS NZX’s new electronic trading platform went live in July, with the launch of the new GlobalVision trading system provided by Trayport. The GlobalVision trading system has opened up new opportunities for the market, such as the potential to develop a derivatives market, enabling trading across a wider range of market products. The GlobalVision system will provide market infrastructure for the NZX Markets, AXE ECN in Australia and TZ1 Carbon Market.

NZX AGRIFAX DAIRY INDEX – MONITORING THE PERFORMANCE OF THE NEW ZEALAND DAIRY INDUSTRY NZX Agrifax developed the Dairy Index earlier this year to measure the growth and return of the New Zealand dairy industry. The NZX Agrifax Dairy Index is calculated by combining capital values and returns for dairy farmers, dairy exporters and companies associated with the dairy industry, together with dairy commodity prices and the exchange rate. The NZX Agrifax Dairy Index finished up at 1254 at the end of the first half of 2007. The index baseline is 1000 and calculation began on January 1, 2007. The index climbed 154 points in the month of June following the increase of Fonterra’s predicted payout to dairy farmers to $5.53 per kg of milk solids for the current season. Other key contributing factors to index rise in the first half of 2007 were the high exchange rate and the continuing rise of global dairy prices. For more information contact NZX Agrifax on (+64 4) 495-2807 or [email protected]

26

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If you have any comments or feedback on this publication, or would like to subscribe to the OPEN mailing list, please email [email protected] This newsletter is provided with the understanding that neither NZX nor its representatives are engaged in rendering professional advice or services. NZX and its representatives make no warranties, express or implied, as to the accuracy of the content of this newsletter. Neither NZX nor its representatives shall be liable for any direct, indirect, consequential or other loss arising from the use of this newsletter or any information contained herein and/or further communications in relation to this newsletter. If you wish to unsubscribe from the OPEN mailing list, please email [email protected] DESIGNER – Christine Cheevers COVER – Photo courtesy Otago Daily Times



© New Zealand Exchange Limited, 2007. Printed October 2007