Iwi may be steaming over the Government’s plans to convert State-owned enterprises into “Mixed Ownership” businesses - but so will the country’s “Mum and Dad” investors when they find out what the iwi are being told.

Everyone should read the iwi consultation paper on the Governnent’s plan to convert the four energy sector State-owned enterprises into “Mixed Ownership” businesses with 49% of their shares in private hands. The paper raises issues that go far beyond the current hot topic of whether the new businesses should carry the Treaty of Waitangi obligations that currently apply to them in state ownership.

The consultation paper is as important for what it doesn’t say, as it is for what it does. The iwi consultation document contains no reference to the Government Ministers’ widely touted pre-election expectation that between 85 and 90 percent of the shares sold will be in New Zealand ownership, or to its soothing statements that it will be creating a sound opportunity for the sorely-tested “Mum and Dad” investors in the country.

The Government’s New Zealand ownership expectations are now expressed in a vacuous statement about a “test” requiring that New Zealanders will be “at the front of the queue for shareholdings and the Government is confident of widespread and substantial New Zealand share ownership”.

Of course, that test will be met. The Government will hold 51% of the shares to begin with, and the investment bankers managing the sale will be offering shares directly to large investors [such as Kiwisaver Funds, other managed funds, and – if they wish – to iwi] during what’s called the “book build” – a type of pre-issue auction that determines the price for all investors.

But while New Zealand institutional investors may be at the front of the queue in the book building process, it looks like “Mum and Dad” investors will be in the tail.

If demand exceeds the supply of shares available, the Government will “scale” allocations to interested investors. It will have control over which groups of investors get their share order scaled down and by how much. It will also determine the definition of “widespread and substantial New Zealand share ownership” as it sees fit – 65%, 75%, 85%, 90%, who knows?

The Treasury reminds me, in a response to an Official Information Act request, that the Government’s objectives include “optimizing the value for the Crown of the Mixed Ownership companies and freeing up capital for other uses…”

The Treasury also confirms that it still holds the view that “significant participation by foreign investors will be essential to achieving the Government’s overall objectives.” Even if the Government resurrects its old “expectation” of 85-90% New Zealand ownership, that still means foreign investors could be solicited in the book building to buy between 20% and 30 % of the shares on offer to generate more competition among potential buyers and crank up the value of the return on sale to the Crown.

The iwi consultation paper makes no statement at all about any specific limit being placed on foreign investment in the Mixed Ownership companies. It also says nothing about limiting share buyers – domestic or foreign - as to the number of Mixed Ownership energy companies in which they can hold shares.

The paper also contains a major contradiction about the cap on individual shareholdings. Early in the piece, it says the Crown will bind itself to hold 51% of the shares in the Mixed Ownership companies, and “no other investor will be able to hold more than 10 percent of the shares with voting rights in each company.”

That statement is contradicted a few pages later. Under an innocuous heading about “Placing the companies under new legislation”, the paper also says “trustee corporations or nominee companies that hold shares on behalf of other persons may be exempt from the 10 percent limit”.

It seems possible that a single trustee corporation or nominee company could acquire a very powerful position by investing in all the Mixed Ownership companies in the strategically important energy sector, under the terms outlined to the iwi.

The danger of this situation is highlighted by another statement in the consultation document. In previous papers released by the Government, there was discussion – but no resolution – of matters such as Crown veto rights on the appointment of directors, the number of Directors to be nominated by the Crown [and voted into office by the 51% owner],and other Crown voting rights on business standards and special resolutions.

That discussion is over. The consultation paper says crisply that the Crown “will not reserve any special rights to itself, except that it is still to decide whether it will have any special power to approve the Chairman of the Board, as it has for Air New Zealand.”

So, if the Crown has no special powers, beyond those of a 51% shareholder in an ordinary listed company, what particular ability does it have to ensure its Treaty obligations – or any other broader social obligations – are met.

Iwi have every right to be cautious about the Government’s proposals for Mixed Ownership. The rest of us should be just as cautious. There are too many loose ends in the plan that’s being rushed into place.