Anderton scores own goal over People's Bank

Friday 10th August 2001

JOHN FARRELL: Warned about risk-free investment offers

JIM ANDERTON: Allegedly breached securities law

SPECIAL INVESTIGATION

By Jock Anderson

A commercially attractive plan to fund the People's Bank by a "public-private partnership" was doomed the minute Deputy Prime Minister Jim Anderton opened his mouth.

And no amount of defensive 11th-hour "legal opinions" of the kind desperately tabled in Parliament by the government last week are likely to change that reality.

As recently as November government officials still considered that a mixture of government and private share holding in the bank could improve its governance regime and reduce government costs - making the proposal more acceptable.

Officials had even rejected - in October 2000 - a New Zealand Post (NZPL) proposal that the government fund the bank's total establishment costs - to the tune of $80 million.

But 14 months ago a commercially suicidal mouthful from economic development minister Mr Anderton helped push the public cost of funding the bank from $40.8 million to nearly $80 million, putting paid to a public float.

According to commercially secret government papers obtained by The National Business Review Mr Anderton broke securities law when he effectively advertised the bank and touted a proposed public redeemable preference share float on national television in June last year.

Government advisers believed Mr Anderton's public statements breached the Securities Act and Securities Regulations and opened him, the Crown and New Zealand Post and bank directors to potential civil and criminal liability.

The government quickly backed off the "public-private partnership" idea and, according to Finance Minister Michael Cullen's office, began officially using an $80 million cost figure from February 20 this year.

An official complaint against Mr Anderton was last week made to Securities Commission chief executive John Farrell and registrar of companies Neville Harris by Act New Zealand finance spokesman Rodney Hide, who wants Mr Anderton prosecuted for breaching the Securities Act and Securities Regulations.

Mr Farrell confirmed the complaint had been received but refused all other comment, including how long it would be before he could confirm if Mr Anderton broke the law.

(Three years ago Mr Farrell warned the public against putting money into investments touted as "safe" or "risk free.")

Mr Harris' officials confirmed that the complaint would be dealt with under normal circumstances by the companies' office securities and compliance unit, which would require Crown Law Office advice if, and before, charges were laid.

Details of the "public-private partnership" plan are revealed in documents published for the first time in NBR today.

They paint an interesting picture of a scheme that ought to have worked - had it been given a chance.

In a November, 2000 high priority document deemed commercially secret the Crown Company Monitoring Advisory Unit (CCMAU) and the Treasury were still telling the government that a mix of 51% government ownership and 49% private equity was favoured.

Such a mix was earlier considered at a top level government meeting on October 26, 2000 when attempts were made to reconcile the issues associated with raising equity through a float of shares.

The November, 2000 CCMAU/Treasury report was simple.

It recommended a structure whereby the government - through its ownership of NZPL - would put up $40.8 million to own a 51% controlling interest in the bank.

The remaining $39.2 million (representing 49% shareholding) would be raised by a public redeemable preference share offer, the cost of which to be borne by the government

Officials did not consider that option involved any "insurmountable obstacles."

But again they warned against and deemed inappropriate another of Mr Anderton's funding schemes - this time to extract money from another business such as the Public Trust Office.

Outlining advantages of a public-private partnership officials said the float would provide New Zealanders with the opportunity to have an ownership interest in their own bank - which would give "tangible effect" to the public-private partnership.

A partnership would reduce the amount of money put in by the government and enable the risk to be shared with other shareholders.

A partnership might also help mitigate concerns about the bank acting uncommercially or crowding out the private sector.

Officials said it was desirable that other banks saw any bank launched by the government through NZPL as "a straight commercial venture."

"Signalling that NZPL's bank is commercially driven and will not take on a social service operation to operate unprofitable branch networks is important to prevent NZPL and share holding ministers being manoeuvred into an unattractive position by NZPL's competitors," officials said.

Officials said a partnership, among other advantages, would provide a strong incentive for NZPL - whose directors would sign any prospectus - to ensure its business case was robust; would ensure the bank operated on a true "arms-length" basis from NZPL with properly specified contractual arrangements and separately reported financial results; and provide a richer set of options for performance incentives.

The presence of other shareholders, listed shares and the need to comply with stock exchange reporting requirements would enhance pressure on the bank to be efficient and profitable.

The partnership would also limit informal relationships and the ability of ministers to control the strategic direction of the bank.

"In practice this could mean ministers' ability to informally influence the direction of the company, including specific investment or diversification proposals, may be curtailed," officials said.

They said the bank was likely to have improved commercial credibility because the perception of the public and the business community that the bank was a truly commercial venture would be enhanced.

They said if shares were sold to a substantial number of public investors those investors might be more willing to switch to the People's Bank, which would assist it in reachIng the critical mass of customers needed to be viable.

A public-private partnership would disadvantage the government because of a reduced share of dividends to NZPL. However, officials said that would not reduce the overall profitability of the project - which could be enhanced if governance arrangements were improved.

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