Government gets advice on 28-year-old idea for billion-dollar merger and potential sale of state assets

On January 9, State-Owned Enterprises Minister Paul Goldsmith and Finance Minister Nicola Willis were given a Treasury briefing 28 years in the making.

The briefing, which Goldsmith had requested from Treasury, concerned a longstanding idea
to create a massive holding company which would own New Zealand’s state assets, like Kiwibank, KiwiRail, Transpower, TVNZ and the part of Air New Zealand that remains in state control.

The Government is quick to point out this idea is not policy and it is just getting advice from Treasury, which it is “open minded” on. Prime Minister Christopher Luxon has previously said “no” to state asset sales, but ministers have asked for advice on their performance and the rationale for their state ownership.

January’s Treasury advice, obtained by the Herald under the Official Information Act (OIA), wryly noted that it had provided “advice on a holding company on several occasions, dating back to at least 1996″. It noted that the most recent advice was tendered as recently as 2019. New Zealand Governments past and present are very, very interested in the idea.

The reason the idea is so popular is a company called Temasek.

Temasek is the Singapore Government’s holding company. It holds state assets on behalf of Singapore, and it has done a very, very good job of managing them.

This is in contrast to New Zealand. Treasury considers that while most of New Zealand’s State-Owned Enterprises (SOEs) generally perform worse than their privately-owned peers, Temasek has grown a S$380 billion ($462b) portfolio that is generally thought to perform rather well.

Treasury told the last Government that the poor, almost uncommercial performance of the SOEs had cost the Crown $13.6b in the 10 years to 2018 which might have been earned were they as successful as other, more commercial entities the Crown has an interest in.

“Entities in 100 per cent Government ownership have produced aggregate returns of 0.1 per cent per annum, against a cost of capital of 10.9 per cent,” Treasury wrote.

The Herald has previously revealed those papers, which concerned Labour and NZ First looking at the idea of rolling the assets into a holding company – the very idea the current Government is being briefed on. The Government eventually decided against the idea. As an Associate Minister for SOEs under the last Government, Shane Jones even went on a fact-finding mission to Singapore to meet Temasek officials with Treasury deputy secretary financial and commercial operations Jon Grayson.

Treasury reckoned the idea had merit. One briefing said the holding company would generate $44b in returns between the early 2020s and 2060, $27b more than the SOEs will generate under the current model.

The plan fell apart because of one big catch: in order to get the benefits of the Temesek model, the Government would have to give any Kiwi-Temasek the power to sell down stakes in assets it did not want to own.

Treasury believed that the “wellbeing” sacrificed by losing direct control of the SOEs could be made up for by the fact the new holding company would be incredibly profitable. Those profits could be reinvested in wellbeing-generating initiatives through the Government’s normal budget process, but the former Government was not having it. Labour-NZ First were both quite against asset sales.

There was every chance that a Temasek-style company would want to sell stakes in one of the Government’s many struggling assets.

Treasury reckons that 24 per cent of all the assets that are entirely owned by the Government are in sectors that are currently being “disrupted”. This includes NZ Post’s letters division, TVNZ and Kordia. It reckoned 61 per cent of the portfolio faced future disruption risks.

The new briefing shows the current Government is looking at the idea.

Luxon is known to be an admirer of Singapore and frequently peppers his speeches with references to his desire to make New Zealand mirror Singapore’s success. During his recent visit to Singapore, he met with the top levels of Temasek.

Deputy Prime Minister Winston Peters is also a fan and in a recent interview with the Herald he expressed admiration for the model.

When asked if New Zealand should also look at instituting Singapore’s model, Peters says a lot of time was spent trying to get Labour involved with the Treasury on this issue in a previous Government.

“It works. I’m seeing a whole lot of countries who are thinking that way.”

Goldsmith told the Herald that ministers were “considering advice from Treasury on setting ownership purposes to understand, in each case, why we own an SOE and what we are trying to achieve from that ownership”.

He said they have “open minds” about “arrangements that could help ensure that the Crown’s investment in assets delivers value for New Zealanders, however, no work is currently under way on alternative ownership structure of SOEs, including on a Temasek-style holding company”.

Act leader and Associate Finance Minister David Seymour told the Herald he thought the idea was “interesting, but it’s also not Government policy at the moment”.

The January Temasek briefing said Treasury continued to believe SOEs’ performance was “poor” against their primary objective, which was to run like commercial companies and make money. This was based on data going back to 2019, which had not been updated. However, they believed that if the data were updated, they would still think the same way.

Officials said they there was an “absence of a clear ownership purpose for the Crown” and an absence of “investment mandates for the entities”.

They also said there was a lack of investment in the entities and a lack of “rebalancing the portfolio”. Rebalancing, officials said, would involve “buying new assets and reducing ownership of existing ones”.

The officials reiterated their advice that a holding company would generate greater return if given “a high degree of operational independence”. Treasury warned, however, that this independence would mean allowing the holding company to do things ministers did not want to do.

“[O]ne of the tests for proposing a holding company is that ministers have to be willing for the holding company to do things that ministers have, historically, not typically wanted to do themselves (or at least not wanted to do often, such as asset sales),” the officials said.

There are a couple of other catches too. The Crown owns a 51 per cent stake in listed electricity companies. However, because of competition issues, the holding company could only own one of these firms, rather than all of them. The value of the companies and the dividends they create is such that Treasury wanted at least one of them or grid operator Transpower to be included in the holding company.

Treasury said the Government should start by thinking about why it owns certain entities. If the purpose were commercial, they should probably go into a holding company. If, however, there is another, secondary purpose, like for example TVNZ’s role as a platform for local content and news, the entity should remain in direct Crown ownership.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.