Last week the Law and Economics Association of NZ (LEANZ) held a "sell-out" seminar evening in Wellington.  The topic – Partial Privatisation of SOEs"

Phil Barry the principal speaker, corrected myths about the outcomes of privatisation. The audience noticeably sat up when he was introduced as an adviser of Toll Holdings on its NZ Rail deal with Dr Cullen. Phil was unequivocal – privatisation added effciency and value, and foreign participation improved the figures

I spoke on the implications for directors, officials and ministers of retaining a Crown shareholding. My presentation notes will be found on the LEANZ website.

I think the capacity audience was a tribute to professionals' eager anticipation of advisory and other roles in partial privatisation.

Curiously no questioner pursued the aspect that I think is the most interesting – how a democracy handles fears that the family silver is not only up for sale, but it might go to foreigners. 

The government, sensibly, is thinking about the detail, though they'd rather leave detailed work until after the election, lest they be accused of prejudging the election. Voters will decide if the government has a mandate.  I doubt that the government will get  through the election without explaining how they'll ensure that privatisation and patriotism can co-exist.

So what is the issue, and what kind of steps would protect a vendor government from voter fears?

The government has been urged to look at the model of Singapore's holding company, Temasek.  It looks attractive as do many things Singapore has achieved. But most of them could require more courage than our current politics throws up.

There is respectable NZ precedent for limits on share parcel size, so buyers cannot accumulate controlling stakes (the current NZX for example). For many years Air NZ had sharehlding caps, and also a two class share capital. Only New Zealand 'residents' could own the controlling class.

We may not get to the bottom of this until we've had the debate that lies underneath the worries of many New Zealanders – that is whether we should be concerned about foreign control. The LEANZ session did not get into that.

Long term, open borders for investment are better for us, if we are rich enough ourselves to invest elsewhere. In my experience, however, even well informed voters can be anxious about control passing to foreigners. Those unpersuaded of the benefits of open markets will regard sale to foreigners as a form of treachery.

I don't think any current politician in a democracy could harangue that worry away. I argued at the seminar that share transfer restrictions, though opposed by many with religious fervour, are almost universal in the constitutions of private companies where the shareholders have a free choice. They presumably know that restrictions are considered, authoritatively, to diminish share sale values. There must be some compensating value to shareholders who support such provisions.

With a near universal fear of foreign ownership we should consider whether that too is a revealed preference, showing a voter instinct that may be sound. Assuming that control will pass overseas is a symptom of decline. The long term solution should be greater productivity, not ownership restrictions, but perhaps people know intuitively that greater productivity as a solution is intangible. It is easily sacrificed to the current votes secured by transfer payments. In the meantime voters will react viscerally against leaders who appear indifferent to the transactions that evidence national decline and allow control to depart.

The government must show very early that it is patriotic if the process of privatisation is to be sustainable politically. As humans we are primed to be suspicious of “them” (i.e. not “us”). Many of our customs and skills are designed to enable us to distinguish them from us speedily, including things as basic as speaking accent. A government that tells people to ignore such deep instincts will not long be entrusted with power.  At best governments can corral and channel or steer such instincts within constructive boundaries.

Secondly, there is good reason to consider whether our competition law and other mechanisms for limiting collusive exploitation will be enough if we naively allow control to fall into the hands of “not us” who are indifferent to us. There could be a big difference, for example, in control from an American or other English speaking country company with competition law experience and traditions, and deep patterns of rule of law observance, and control from countries without that, like China. People will sense that no competition law would protect us, for example, if dominance of an industry fell into the hands of Chinese companies whose governance is opaque. Would we ever know if they planned collusion overseas? How would we know if they were instructed by their government or banks to collude?

The Australian FIRB distinguishes openly between applications from different nations

In my practice years ago I became familiar with many kinds of control restriction. I drafted many. They included:
a) Golden shares;
b)  Share classes , some of which can only be held by locals;
c) Share classes with weighted voting (the common European pattern up until recently)
d) Share parcel size (control) caps and maximum shareholding limits;
e) Board composition restrictions.

Others could serve dual purposes such as:
a) Free carry interests for the state (as in the oil industry on investment in exploration)
b) Special transparency rules to give assurance on accounting;
c) Special tax regimes, for example a capital gains tax on super profits;
d) Thin capitalisation rules and other constraints on structure;
e) Distribution restrictions (if they exist – thinking of the popular view that NZ Rail was looted by FR and Wisconsin).

My experience of control protection devices is empirical. I'd like to know more of the research data of the kind Phil Barry presented, enabling calculation of the likely relative market value impacts of the range of control limiting devices.