PEN

2006
2007

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 FOREWORD
BUSINESS ASSETS
Jenny Morel There’s something comfortingly Kiwi about queueing
Managing Partner, No 8 Ventures Management overnight in the freezing cold, wrapped in deceptively
chilly acrylic regalia, for tickets to the Big Game. You’ve
20 BALANCING OWNERSHIP WITH been a supporter since you can barely remember. You
follow the team’s fortunes with fervour. You’re entitled to
PERFORMANCE your ticket, even if it isn’t in the covered section and even
Hon Bill English if you have to rely on the plasma for most of the action.
Member of Parliament
You’re entitled.

22 KIWISAVER – POSITIVE FOR If the SOE sector were a home game involving our national
side, we’re the ones still shivering overnight in the queue;
NEW ZEALAND’S CAPITAL only this time there’s no hope of securing a seat. The
hospitality boxes, with their society shoulder-rubbing and
MARKETS fancy catering, are occupied by representatives of the
Smartshares Crown. The rest of the stadium is empty and echoing.

And where are we? We’re waiting at home for the highlights,
24 NZX MARKET UPDATE 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

3
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.
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
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.
“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 the world (e.g., New York Times, and many other
their private sector comparable companies. The focus on companies have a structure where a cornerstone
dividend, and returns against the book value of assets investor determines key strategic decisions that go
is misleading. Many commercial SOEs report results beyond purely commercial matters).
that would be unacceptable in a listed environment. A
(c) New Zealand owned. It’s also an important element of
sharpening of performance scrutiny can only be positive,
an ownership culture – and to ensure that there are
as there will exist incentives to
great jobs and talent retained in New Zealand – that
reduce unnecessary fat (while
these companies remain in New Zealand.
building muscle), and to ensure that
THE SOE+ MODEL
there is a growth agenda as well as (d) Remove the fear. As growth strategies have to be
THE RESULT OF THIS MODEL IS A LIQUID SAVINGS an operating one. approved by government, that very fact creates a moral
INSTRUMENT THAT NEW ZEALANDERS CAN CO-OWN hazard for SOE Boards. As there will never be any political
(e) Savings. There’s a growing
IN A MINORITY FASHION, WITH THE GOVERNMENT risk for an SOE that does not look to grow overseas,
recognition of New Zealand’s savings
ESTABLISHED AS PERMANENT MAJORITY HOLDER political ownership becomes a constraint – and SOE
problem. KiwiSaver is designed to
Boards are implicitly incentivised to keep their heads
WITH SUPERIOR VOTING AND ECONOMIC RIGHTS. address this. However, there is a
down and stay quiet. It is critical, under whatever
paucity of investments available for
model, that this fear disappears.
New Zealanders to invest into in their
their own currency. To build the robustness of the capital So these are the issues. Let’s look for an answer.
market (as important to national welfare as Telecom,
but with 1/100th of the attention), including the capital Part V: Three SOE models: Current, Super-Sub,
market skill base, scale is required. New Zealanders need and SOE+
an opportunity to be able to co-invest directly alongside
In the interests of pushing the debate to a solutions focus,
the government in our iconic SOE businesses.
and moving beyond the rhetoric, I suggest there are three
(f) Governance. A publicly listed environment provides options to consider that achieve all the above criteria.
many governance benefits to the government. The First, the current model. Second, the “Super Sub” model
listed environment would also bring increased outlined earlier.
disciplines, and attract the highest quality available
The third model is the SOE+ model. It represents an upgrade to
directors to the candidate pool. Any perception that
the current model along many of the key dimensions identified,
political appointees are made under the government-
but retains the key control and protection rights important to
driven process would diminish.
long-term government ownership. Hence the term, SOE+.
(g) Cost. Transparency and shareholder votes would replace
the function of CCMAU – entailing a material cost saving
for government in the Treasury. THE SOE+ MODEL CLEARLY COULD HAVE A NUMBER
OF VARIANTS – BUT THE CRITICAL THING IS THAT THE
Part IV: “Not-negotiables”
DETAILS CAN BE DESIGNED TO INNOVATE AND IMPROVE
Out of the previous failures, and from forward thinking,
THE EFFECTIVENESS OF THE CURRENT MODEL.
there are a series of factors that must be viewed as “not-
negotiables”; and we certainly don’t propose to argue with
them. The following factors must all be addressed:
The SOE+ model also provides much better protection against
(a) Long-term government control. The government should rort than the current model. In particular, under the current model
not relinquish full control over the asset they have an SOE could be fully sold with nothing more than a change
created. However, there are ways to maintain control of heart. With a series of embedded mechanisms, companies
under capital structures quite different, and significantly under the SOE+ structure would be permanently grounded in the
improved, from those that exist currently. New Zealand economy – to our long-term benefit.
(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 SOE+ MODEL INVESTING IN THE
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
SHAREMARKET
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:
HAS NEVER BEEN SO EASY
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.
If you don’t have much time,
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% money or experience in the
super majority voting provision including the role of Class B shares.

Voting rights – exceptions. The above voting rights would not apply in three sharemarket, Smartshares
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 offers a wide range of
the skill base of the public, if utilised to the full extent, will result in better
decision-making than the government alone. They are: diversified share portfolios.
l election of directors;
l matters of executive remuneration (including issuance of stock to Choose from one of our five
executives); and
l the appointment of an auditor. funds and get your investment
Listing. The Class A common stock shares would be listed.
in the sharemarket started.
IPO. At IPO the government would raise capital by selling common stock to
the public for a minority economic stake (e.g. 30%).

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 The easy way into
investments over the years. The structure of returns below recognise this.
the sharemarket
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. www.smartshares.co.nz
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
Investment Statements can be downloaded from the Smartshares
returns, whether these are generated onshore or in the global arena. The
websites. Units in the funds have been accepted for quotation by
choices should be there for SOEs to make, and for New Zealanders to share. NZX and will be quoted upon completion of allotment procedures.
SOEs are so important that a constructive debate, not a negative one based However the Special Division that regulates Smartshares Limited
on fear, is required. 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:

l Encouraging SOEs to consider utilising their expertise in

offshore markets could provide additional revenues, but
currently there is little incentive to do so.
ANDREW PATTERSON
HUGH BURRETT

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.
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.

l Greater accountability for management performance that The views represented in this article are the express views of the author, and do
ensures capital is utilised effectively. 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 The SOEs can not be exempt from that transformation
over. Philosophical or ideological disputes about the agenda or they will drag on the economy as a whole.
role of the state, and the relative efficiency prospects of
l SOEs are not locked into a straightjacket of what they did
enterprises operating under public or private ownership, have
in the past: they are now authorised (and encouraged) to
been overwhelmed by our experiences with privatisation.
explore diversification opportunities, as long as that works
It might have been the excesses of the times, but the fact is off their proven competencies and into adjacent products,
that the public thinks that under our privatisation experiment, markets and processes. (We are not after heroics.)
public assets built up over generations were sold too cheaply,
l Within that agenda, not all SOEs are similarly placed to
assets were stripped from many of them and the government
move beyond their core business: some basic service
had to step in later with expensive rescue missions, and post-
providers like Transpower will be occupied on the domestic
privatisation rationalisation had disruptive social effects. The
market and on historical functions for as long as anyone
SOEs that remain are viewed as strategically important and
can contemplate.
socially and environmentally sensitive.
l The fundamental requirement with the new SOE
At the last election, only one party (ACT) went into the election
agenda is a lot more emphasis on accountability and
without a pledge to hold on to the SOEs, and that party got
performance monitoring, rather than on different capital
2% of the vote.
market disciplines.
The real question, then, is not if, but how we exercise
Which brings me to if, why and how private equity or quasi-equity
stewardship over a substantial part of our productive base.
(preference shares etc.) might engage with SOEs going forward.
Let me make four basic points. (The Rob Cameron proposal.)
l The government is determined to ensure that we transform As an owner, the government has responsibilities to protect the
our economy around a higher productivity, sustainable future. value of its assets and here I come to three crucial points.

10
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.

l If the government did seek capital injections, it is better

HON TREVOR MALLARD

placed to borrow on advantageous terms (using scale, or
security) than through public offerings.

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 Hon Trevor Mallard is Minister
for Economic Development and
the international investment community. Why would
Industry and Regional Development.
a government reduce the common wealth to effect a Trevor also chairs the Economic
regressive wealth transfer? Transformation Ministers group.
He has been Associate Finance
In terms of the operations of SOEs, a dilution of government Minister since 1999, and has
also held the portfolios of Energy,
ownership by whatever means would be very little different from
Education, and State Services.
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: “RATHER THAN TRYING TO MUSCLE IN ON A PIECE OF A

l The current practice of preparing a Statement of Corporate WELL PERFORMING ACTION, PRIVATE EQUITY NEEDS TO
Intent (SCI) allows shareholders to negotiate with SOEs over
balance, priorities and corporate profile and personality. TRY AND THINK OF PARTNERING AROUND VENTURES
That would have to be transparent during (not just after)
the process of negotiating SCIs, and would largely sterilise THAT CAN ADD VALUE TO BOTH PARTICIPANTS.”
what is currently a fertile process.

l The “no surprises” policy allows regular interchange between

shareholding ministers and SOEs, but the surprises would The government has created an opportunity to let the creative
then need to be communicated to the market, and are likely juices flow.
to be more extreme when they are.
Last year, I coined the phrase “partner, not plunder” when
So where is the potential for SOEs expansion? it came to foreign investment in New Zealand – as a way
Rather than trying to muscle in on a piece of a well performing of retaining and continuing to build on the Kiwi national
action, private equity needs to try and think of partnering around economic identity.
ventures that can add value to both participants. 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 The views represented in this article are the express views of the author, and do
domestic and international marketplaces. not necessarily reflect the views of NZX.

11
DEVELOPING
THE SOE MODEL
ROB CAMERON & MURDO BEATTIE, PARTNERS, CAMERON PARTNERS [INVESTMENT BANKERS]
ROB CAMERON
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.
12
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.
l Adopt a commercial organisational model within the Companies Act framework and based
on standard corporate control arrangements such as:
• 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.”

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:

MURDO BEATTIE
l 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.

13
 A PRAGMATIC
AND GRADUAL
APPROACH
GERRY BROWNLEE, NATIONAL PARLIAMENTARY SPOKESPERSON ON STATE OWNED ENTERPRISES
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.
14
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.
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 rent-
seeking 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
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
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.
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 “… NEW AGES BRING NEW PROBLEMS, AND
not grown as fast as they should. This is not just because
WE BY NOW HAVE THREE MEGA PROBLEMS TO
overall economic growth has slowed, but is mostly because
there has been a startling hollowing out of the earned income DEAL WITH. STATE OWNED ENTERPRISES (SOEs)
distribution, with the top five percent doubling or tripling their
returns whilst middle incomes have stagnated. This is where ARE NOT THE MAGIC CURE-ALL FOR THESE
Galbraith and Friedman were both so wrong: market forces
have not prevented corporations generating huge surpluses, PROBLEMS, BUT THEY ARE GOING TO BE PART
and the goals of the technostructure have not inhibited
OF THE SOLUTION.”
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.

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.

17
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.

Offering opportunities for Kiwi mum and dad investors to voluntarily

invest in SOEs achieves both of these important goals.

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 HON BILL ENGLISH
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
 SMARTSHARES

KIWISAVER
FOR NEW
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CAPITAL
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W
XdbZhWVX`idndj 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
?d^cdca^cZÄ behind this initiative to kick start their retirement savings.
_jhi V [Zl Xa^X`h VcY ndjÉgZ V Just five weeks after the KiwiSaver launch, around 92,000
enrolments had been received by Inland Revenue with one
hbVgi`^l^ 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.

NZX’s own subsidiary funds management business, Smartshares,

J^[ icWhj mWo je ][j

joined the ranks of KiwiSaver providers with the launch
of Smartkiwi.

_djeA_m_IWl[h “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

mmm$icWhji^Wh[i$Ye$dp%icWhja_m_ 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.

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
– POSITIVE
Are you listening to
your investors?
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
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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 Thomson Financial's Interactive Annual Report
fairly easy decision to make,” said Davie. offers companies an efficient and cost-effective
KiwiSaver is positive for New Zealand’s capital markets. way to distribute annual reports, while providing
Smartkiwi will appeal to New Zealanders who want a clear
investors and media with a more convenient way
picture of what they’re investing in and are keen to own a part
to review the information.
of New Zealand businesses, thereby actively participating in
this country’s economic growth.
Reasons why Interactive Annual Reports
Because the underlying SmartKiwi funds are invested in benefit your investors:
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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 CAPITAL RAISED HY 2007 YEAR TO DATE
Market Update New Equity Raised ($m) 1,488 1,488

On the first Tuesday of every month the NZX Operating Metrics and a New Debt Raised ($m) 1,162 1,162
BoardRoom Radio audiocast metrics presentation are released. Total Capital Raised ($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 HY 2006
(% CHANGE)
The latest NZX Operating Metrics and audiocast are available on the front
page of the NZX Website. Total Number of Trades 309,010 3%
Total Trades <$50k 267,093 3%
NZX Operating Metrics Half Year 2007 – Highlights Daily Average Trades 2,512 3%
Total Value Traded ($m) 16,850 - 9%
l Strong index performance in first half continues – The NZX 50
Index ended the first half of 2007 on 4,234, an 18% increase Daily Average Value Traded ($m) 137 - 9%
since the same period last year and a 4.4% increase since the NZSX Market
beginning of 2007. The NZX 15 Index is up 20% since the same Number of Trades 292,052 4%
period last year. Valued Traded ($m) 16,179 - 7%
l Equity raising up 116% on same period last year, total capital raised NZDX Market
tops $2.5 billion – Total capital raised in the first half of 2007 is up 28% Number of Trades 13,699 - 7%
at $2.65 billion year to date, compared to $2 billion at the same time Valued Traded ($m) 648 - 35%
last year.
NZAX Market
l Average daily trades up 3% – Average daily trades up 3% on the same Number of Trades 3,259 - 24%
period last year at 2,512, compared with 2,442 for the first half of 2006. Valued Traded ($m) 23 - 44%
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 HY 2007 HY 2006
(% CHANGE)
HALF YEAR UPDATE – 2007 NZX 15 Index 57% - 23%

NZX LISTED ISSUERS TOTAL NZX 50 Index 45% - 17%

NZSX Domestic 129 NZX All Index 43% - 19%

NZSX Dual Full 2

)
NZSX Overseas 41
NZDX 52 MARKET DATA
NZAX 27 Primary Data Distributors 20
Total NZX Listed Issuers 236 Real Time Data Distributors 9,344

24
U P D AT E
INSTALMENT WARRANT TRADING TRADES CHANGE VALUE NZX MARKET – NEW LISTINGS AND CAPITAL RAISED
TRADED
The first half of 2007 saw a record amount of capital raised by both new and
5,449 35% 55 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
MARKET CAPITALISATION ($B) HY 2007 HY 2006 % OF GDP Leisure Limited, MFS New Zealand Limited and BurgerFuel Worldwide Limited.
(% CHANGE)
SunSeeker Energy Limited recently listed on the NZAX Market, the cost-
All Equity $77 13% 46%
effective growth platform for early stage and high potential companies.
NZSX $77 13% 46%
NZAX $1 - 20% N/A 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.

NZX INDICES PERFORMANCE HY 2007 HY 2006

(% CHANGE)
HI-TECH AND THE NZX MARKETS – GROW FROM
NZX 50 Index 4,234 18%
HOME, GO GLOBAL
NZX 50 Portfolio Index 2,479 14% In November NZX will run a “Technology and the
NZX 15 Index 7,790 20% Markets” conference in Wellington to coincide with
the PwC Hi-Tech Awards, based in the capital city this
NZAX All Index 1,203 - 7%
year with the theme “Kiwis can fly”.
NZX SciTech Index 1,407 5%
Kiwis can fly and many of our NZX companies have
shown this to be true.

SMARTSHARES HY 2007 HY 2006 The New Zealand technology sector is thriving, with around 10,000
(% CHANGE) biotechnology, information technology and industrial technology companies
Funds Under Management ($m) 371 12% innovating from New Zealand.
Number of Unitholders 14,818 2% 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

LINK MARKET SERVICES HY 2007 CHANGE technology sector the opportunity to better understand value and develop
strategies for growth.
NZX Listed Issuers 79 4%
Other Instruments 48 - 4% 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.

25
We have seen technology and talent emerging and we have seen the investor NEW I-SEARCH LAUNCHED – THE WINDOW TO THE
support grow. New Technology listings Xero is the latest addition to the NZX
MARKET PLACE
SciTech Index, which tracks the performance of 25 NZX Listed biotechnology,
industrial and information technology companies. NZX has upgraded Market Information products, with all new products now
accessible via the i-Search platform.
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 These products include the Weekly Diary, the Daily Index Files, Market Share
economy, and create value for New Zealanders,” and there is room for more Statistics and the existing Announcement/Company News database.
Hi-Tech talent to join them. Contact data@nzx.com for a free trial.

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

info@nzxagrifax.co.nz

26
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www.omf.co.nz Call 0800 500 580

27

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DESIGNER – Christine Cheevers

COVER – Photo courtesy Otago Daily Times

 © New Zealand Exchange Limited, 2007. Printed October 2007