Reference: 20170274

25 October 2017

Thank you for your Official Information Act request, received on 14 August 2017. You requested the following:

Since 1 January 2016:

1. All reports, business cases, briefings, studies, analysis, memos, correspondence (written or electronic) and other relevant papers relating to the sale of major assets held by entities within the Crown's Portfolio of Commercial Entities.

If the request above is refused, aside from the grounds, we wish to have specific confirmation from Treasury whether or not there are 1. documents falling within scope of the above request and 2. the entity or entities that documents falling within scope of relate to.

2. All reports, briefings, studies, analysis, memos, correspondence (written or electronic) and other relevant papers relating to the Crown's Portfolio of Commercial Entities, involving their sale (including proposed sale) of entitie(s), inclusive of any sale and leaseback of major assets and/or a sell-down of the current Crown’s shareholding and/or the structural separation of assets with the intention of sale and/or an IPO (partial or whole).

If the request above is refused, aside from the grounds, we wish to have specific confirmation from Treasury whether or not there are 1. documents falling within scope of the above request and 2. the entity or entities that documents falling within scope of relate to.

Since 1 January 2011:

3. Specifically relating to Transpower – all reports, business cases, briefings, studies, analysis, memos, correspondence (written or electronic) and other relevant papers relating specifically to the sale and leaseback of major assets and/or a partial sell-down of the Crown’s interest and/or the separation of assets and/or an IPO (partial or whole).

If the request above is refused, aside from the grounds, we wish to have specific confirmation from Treasury whether or not there are documents falling within scope of the above request.

In email discussions with us, you subsequently clarified the scope of this request:

[Question 1] is asking whether there are plans to sell any SOE-like assets that is monitored by your unit. If the request is refused, please indicate if there are documents that fall within scope (i.e. refused due to commercial sensitivity, but there are documents that do exist), including the entity it relates to.

[Question 2 is] more or less as above, but looking at the structure of sales (i.e. any plans to sell TVNZ studios, but lease back or IPO TVNZ).

I can advise that we would like to exclude:

• Tradable Investment Funds where the holding is less than 10% of a company’s value (so for example NZ Super Fund/ACC readily traded assets are excluded but significant holdings, eg Z, is captured); • Otakaro Limited; • Crown Fibre Holdings; and • Solid Energy.

As advised to you on 29 August 2017, we are responding to you on the basis of a scope that has been narrowed to Treasury advice to Ministers, as a broader scope to your request would have required substantial collation or research. As it was, the narrower scope for Treasury advice required us to review over 600 documents.

We have also excluded Treasury advice on any transactions that have already been announced, on the grounds that this is outside the scope of your request.

Information Being Released

Please find enclosed the following documents:

Item Date Document Description Decision

1. 13 Mar 2017 T2017/95: Mixed ownership of the Crown's Release in part commercial portfolio

2. 10 Feb 2017 T2017/221: TVNZ: update Release in part

3. 16 Feb 2017 T2017/269: Christchurch Airport Shareholding Release in part

4. 27 Feb 2017 T2017/369: Aide-memoire: Christchurch Release in part Airport – notes for discussion with your colleagues

5. 29 June 2017 Relevant sections of Treasury report Release in part T2017/1669

2

I have decided to release the relevant parts of the documents listed above, subject to information being withheld under one or more of the following sections of the Official Information Act, as applicable:

• Commercially sensitive information:

- section 9(2)(b)(ii) – to protect the commercial position of the person who supplied the information, or who is the subject of the information

- section 9(2)(i) – to enable the Crown to carry out commercial activities without disadvantage or prejudice

- section 9(2)(j) – to enable the Crown to negotiate without disadvantage or prejudice

• Confidential information, section 9(2)(ba)(i) - to protect information which is subject to an obligation of confidence or which any person has been or could be compelled to provide under the authority of any enactment, where the making available of the information (i) would be likely to prejudice the supply of similar information, or information from the same source, and it is in the public interest that such information should continue to be supplied

• Legal advice, section 9(2)(h) – to maintain professional legal privilege

In making my decision, I have considered the public interest considerations in section 9(1) of the Official Information Act.

In relation to document 1, please note the Minister for State Owned Enterprises’ comment on page 4. While this is technically outside the scope of your request, the Minister asked that we include his comment in the information released to you.

Television New Zealand Ltd (TVNZ) was consulted by the Treasury on the release of document 2 above, and asked that we include the following comment in our reply to you:

“[This document] is an excellent summary of where things were at the time [February 2017]. Of course there have been several developments in the free-to-air TV sector since then, most notably:

• MediaWorks TV and Prime’s performance has worsened • Financial performance of Australian broadcasters has deteriorated - as evidenced by Seven West Media and Channel Nine have each posted huge losses (A$745m and A$203m respectively) which included content write-downs • TVNZ’s international content yield has deteriorated and we have written down the value of our Disney agreement • Channel 10 in Australia has gone into receivership.”

3

Documents 3 and 4 above refer to an approach to the Treasury regarding the Crown’s shares in Christchurch International Airport. Ministers decided not to proceed with a transaction.

Document 5 above, the relevant sections of Treasury report T2017/1669, refers to Treasury’s proposal that Ministers sell a small number of shares in Air New Zealand, Genesis Energy, Mercury NZ and Meridian Energy, reducing the Crown’s shareholding in these companies to 51.0%. Ministers decided not to proceed with the proposed sale.

Other than the material above, under section 10 of the Official Information Act, the Treasury neither confirms nor denies the existence or non-existence of any other information covered by your request.

Please note that this letter (with your personal details removed) and enclosed documents may be published on the Treasury website.

This reply addresses the information you requested. You have the right to ask the Ombudsman to investigate and review my decision.

Yours sincerely

Angela Graham Manager, Commercial Advice

4

OIA 20170274 Information for Release

1. T2017/95: Mixed ownership of the Crown's commercial portfolio 1 2. T2017/221: TVNZ: update 23 3. T2017/269: Christchurch Airport Shareholding 34 4. T2017/369: Aide-memoire: Christchurch Airport – notes for discussion with your 38 colleagues 5. Relevant sections of Treasury report T2017/1669 40

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Treasury Report: Mixed ownership of the Crown's commercial portfolio

Date: 13 March 2017 Report No: T2017/95 File Number: SE-2

Action Sought

Action Sought Deadline Minister of Finance Discuss this report with us None (Hon Steven Joyce) Refer a copy to the Prime Minister Associate Minister of Finance Note contents None (Hon Simon Bridges) Associate Minister of Finance Note contents None (Hon Amy Adams) Minister for State Owned Enterprises Discuss this report9 with us None (Hon Todd McClay)

Contact for Telephone Discussion (if required)

Name Position Telephone 1st Contact Juston Anderson Principal Advisor, Commercial s9(2)(k) s9(2)(a)  Advice Angela Graham Manager, Commercial Advice

Actions for the Minister’s Office Staff (if required)

Advise Treasury whether Ministers wish to follow up the report with a discussion, and return the signed report to Treasury.

Note any feedback on the quality of and the report 9(2)(ba)(i)

Enclosure: No

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Treasury Report: Mixed ownership of the Crown's commercial portfolio

Executive Summary

This report explores options for further use of mixed ownership within the Crown’s commercial portfolio, focusing on whether the transfer of a minority shareholding in Kiwibank to the NZ Super Fund and ACC provides a template that could be applied elsewhere in the Crown’s commercial portfolio. We would like to discuss this with you.

Consistent with the Government’s current policy settings, this report does not discuss the full range of possible ownership options. Our first-best advice would be for the government to exit from ownership of fully commercial entities (not to transfer ownership within the Crown, i.e. to the CFIs) unless there were public policy reasons for retaining ownership, and those reasons could not be addressed by non-ownership means, e.g. regulation.

While we have not done a thorough review at this time, we expect there would be public policy reasons to retain ownership of few if any fully commercial entities. The basis for this first-best advice is set out in Treasury reports from 2010 and 2011, and we will not discuss it further here. A copy of this earlier advice has been provided separately to your offices should you wish to read it.

This report also does not consider the full transfer of commercial entities to the Crown Financial Institutions (CFIs) as this is not possible under current policy settings for the NZ Super Fund, and there would be significant issues and trade-offs to be considered in changing those settings.

We are happy to report further if you wish to consider a wider range of options.

However the report does discuss what we think would be the single most value-adding option. This would be to make Transpower a mixed ownership model company, by passing legislation removing it from the SOE Act and adding it to Schedule 5 of the Public Finance Act, and then carrying out an initial public offering for up to 49% of Transpower’s shares. Before doing this the government would need to consult with Maori, as it did before the share offers for the three electricity companies.

The primary motivation for considering further use of mixed ownership (in particular part- transfer to the CFIs) is that the Crown has been poor at growing value in commercial businesses where it has been the 100% shareholder.

The constraints on Crown’s behaviour as a shareholder are a significant factor in causing this. Instead of acting to grow value, the Crown as shareholder often acts solely to minimise risk. When companies find themselves in a fast-changing business environment, a strategy of minimising risk will almost always result in decline, and then loss of taxpayers’ equity in the company. There has (to our knowledge) never been a direct equity investment by the Crown in a commercial company with the intention of growing commercial value, at least not in the last 30 years.

The potential benefits from the transfer of a minority shareholdings in a Crown commercial entity to the CFIs are:

• to impose better disciplines on the entity from its new shareholders and therefore better commercial performance, and

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• to allow better access to new equity to allow the entity to grow.

Transactions like this also allow recycling of capital to the core Crown for use elsewhere.

There are some companies in the Crown’s portfolio that we do not consider suitable for transfer of a minority shareholding to CFIs:

• The CFIs already have the ability to invest in the mixed ownership model electricity companies and Air New Zealand (with limits, but the CFIs have never got close to those limits), and • Where companies have mixed objectives, have finite lives (e.g. were set up for a specific purpose and will be wound up when that is completed) or are not financially self-sustaining, introducing an outside ownership interest will carry potential conflicts of interest that are likely to outweigh the benefits. The CFIs will also not be interested in investing in entities that don’t generate a commercial return without government support.

Based on this, we think the potential scope for a follow-on to the Kiwibank transaction is 15 companies with a total equity value of around $4.2 billion (including NZ Post, but not including the value of NZ Post’s shareholding in Kiwibank). Around 70% of this equity amount is in the two largest companies, Transpower and Landcorp. An appendix lists the 15 entities.

The partial transfer of Kiwibank was relatively straightforward, because Kiwibank was a subsidiary of NZ Post, and so not subject to legislative constraints on ownership. Legislation would be required to transfer minority shareholdings to the CFIs in 11 of the 15 entities identified (the other four are the Crown’s 25-50% shareholdings in three airports, and Fairway).

As with the mixed ownership model, moving companies out of the SOE Act would require consultation with Māori on whether this was consistent with the principles of the Treaty of Waitangi (section 9 of the SOE Act). This consultation was undertaken when the MOM companies were moved out of the SOE Act. While this would probably not involve a significant cost, it would take time and could give rise to unexpected issues.

We think it is highly likely that the outcome of this consultation would, at a minimum, require the Crown’s obligations under the existing Treaty principles clause and the memorial land title provisions in the SOE Act to be carried over and apply to any new legislation governing the Crown’s ownership interest in the companies (as was done for MOM companies).

In order to enable the transfer of a minority shareholding to the CFIs, we see two broad options for legislative change:

• legislation targeting one (or a small number) of companies at a time, by removing them from the SOE Act or the Crown Entities Act, and placing them in a new legislative framework for joint shareholdings by the Crown and the CFIs, or • a more comprehensive set of amendments to the Crown Entities Act, and potentially the repeal of the SOE Act.

A new legislative framework, or amending the Crown Entities Act, is required as none of the other existing frameworks would be suitable:

• the SOE Act is based around 100% ownership by shareholding Ministers and would be complex to amend to allow CFI shareholdings

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Treasury Report: Mixed ownership of the Crown's commercial portfolio

Purpose of Report

1. This report explores options for further use of mixed ownership within the Crown’s commercial portfolio, focusing primarily on whether the transfer of a minority shareholding in Kiwibank to the NZ Super Fund and ACC provides a template that could be applied elsewhere in the Crown’s commercial portfolio. In some cases the report compares this option to other forms of mixed ownership.

2. Consistent with the Government’s current policy settings, this report does not discuss the full range of possible ownership options. Our first-best advice would be for the government to exit from ownership of fully commercial entities, unless there were public policy reasons for retaining ownership (and those reasons could not be addressed by non-ownership means, e.g. regulation). While we have not done a thorough review, we expect there would be public policy reasons to retain ownership of few if any fully commercial entities.

3. In our view transfer of minority shareholdings to the CFIs is a second-best option, as it means the Crown still retains 100% ownership of the entities, since it owns the CFIs.

4. The report also does not consider the full sale of commercial entities to the CFIs. This is not possible under current policy settings for the NZ Super Fund, and there would be significant issues and trade-offs to be considered in changing those settings. We are happy to discuss these broader options further with Ministers if you are interested.

Problem definition

5. The SOE Act is now 30 years old. While the SOE Act framework was a significant improvement from what came before it, the 30 year performance history of SOEs in New Zealand demonstrates that the Crown has been poor at growing value in commercial businesses where it has been the 100% shareholder.

6. The constraints on Crown’s behaviour as a shareholder are a significant factor in this performance history. There are many competing demands on the Crown’s capital resources, and investment in commercial companies is generally not a high priority. In fact investment in the commercial portfolio by the Crown (rather than by companies themselves) has only been to support failing companies and/or where there are public policy reasons for the investment. There has (to our knowledge) never been a direct equity investment by the Crown in a commercial company with the specific intention of growing commercial value, at least not in the last 30 years.

7. Public opposition to asset sales also means that it is very difficult for the Crown to

recycle capital within the portfolio by exiting underperforming investments, as a private investor usually would.

8. The consequence is that, instead of acting to grow value, the Crown as shareholder often acts solely to minimise risk. When companies find themselves in a fast-changing business environment, a strategy of minimising risk will almost always result in decline, and then loss of taxpayers’ equity in the company. In the private sector an owner would either invest to transform the company, or sell some or all of the business to another owner – something that is impossible under the SOE Act.

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9. On the other hand, there are numerous examples of SOEs investing to diversify or grow. This has always been from their retained earnings (or their own borrowing) and never from new Crown equity. This is problematic as the companies able to invest themselves are not necessarily the ones that have the best cases for new investment (i.e. there is no process for recycling capital to its highest value even within the commercial portfolio).

10. While there have been some examples of SOE investments or diversifications being successful, there are many more examples of failures. This is sometimes because the SOEs have mismanaged or misjudged the risks, and sometimes because the Crown’s ownership policy has limited their options for partnering with private investors. There are also significant problems in aligning the interests of SOE boards and managers with the interests of the Crown as shareholder. SOE boards and management do not face the full costs of failure (due to weaknesses in the feedback loop between the Crown as shareholder, boards and management), and this weakens their incentives to correctly judge the risks involved in investing.

11. At worst a failed SOE investment results in significant loss of value for the Crown (most notably Solid Energy) and at best, the Crown does not receive an appropriate commercial rate of return on the investment, and so would have been better off if the SOE had paid higher dividends instead (for example Airways’ overseas diversification, or Mighty River Power’s overseas geothermal developments). One contributing factor to this is the Crown’s unwillingness to sell – often a sale is the best way of realising value from an investment.

12. In other words, the Crown often gets the worst of both worlds, neither receiving appropriate returns from successful businesses (because they often invest to diversify rather than paying dividends, and the diversification is often not successful) nor reshaping businesses that face disruption.

13. That is not to say that Crown ownership cannot be a useful tool. The Crown’s strengths are put to best use when:

• supporting commercial entities when they experience difficulties, and where there is a public policy reason for doing so, e.g. Southern Response and Air NZ; and • investing through commercial vehicles where it is seeking public policy outcomes that would not be delivered by the private sector, e.g. Crown Fibre Holdings.

14. This report:

• looks at the reasons for supporting the transfer of a minority shareholding in Kiwibank to the CFIs, and considers whether the same reasoning would apply to other Crown companies in the commercial portfolio • considers the benefits of CFI shareholdings compared with other mixed ownership arrangements currently operating in the portfolio

• sets out the constraints that exist under current legislation • sets out a menu of options, both with and without legislative change, that seek to make possible a broader range of ownership arrangements for commercial companies.

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15. In 2010 Treasury provided some advice on the Crown’s ownership of commercial entities (T2010/2513 refers). Following this, the Government requested advice on extending the mixed ownership model that already existed for Air New Zealand to the three electricity companies, and reducing the Crown’s shareholding in Air New Zealand (T2011/336 refers). These reports identified the main high-level issues and tradeoffs involved in the Crown’s ownership of commercial businesses, and in implementing the mixed ownership model. We have sent copies of these reports to your offices.

What are the potential benefits of transferring a minority stake to CFIs?

16. The potential benefits from the transfer of a minority shareholding in Kiwibank to NZSF and ACC are:

• to impose better disciplines on Kiwibank from its new shareholders and therefore better commercial performance, and • to allow better access to new equity that Kiwibank requires to grow.

17. The Kiwibank transaction also has the benefit of allowing recycling of capital to the core Crown for use elsewhere (since the CFIs paid NZ Post for their shareholdings in Kiwibank, and NZ Post returned some of these proceeds to the Crown as a dividend).

18. Broadening shareholdings to multiple stakeholders should mean that more expertise is brought to bear on company performance. The effectiveness of scrutiny is still likely to fall short of the market monitoring that would occur for a listed company, or under the private equity model (which, for a number of reasons, we do not think is a realistic option for the Crown under current settings).

19. However, investing to generate value is the core function of NZSF and ACC Investments, and their performance to date has been strong. Their monitoring functions are generally well-resourced (in proportion to the value at risk) and the performance incentives on the monitors are aligned with improving company value. Both NZSF and ACC are rapidly growing their capability in direct investment, but their capabilities are not yet fully mature, and there are limits to how fast they can grow. This means large transactions with the Crown would need to be carefully considered so as to not over-stretch the CFIs’ capability as owners.

20. NZSF and ACC are also less constrained than the Crown in making commercial decisions. They have a simple commercial return objective. They have easy access to new capital if required, and a systematic portfolio management approach to govern allocation decisions. Nor are they constrained by the practices that have developed over 30 years of SOE monitoring by the Crown. These practices, which essentially support an arms-length relationship between entities and Ministers, exist to help protect SOEs from political interference in their operations. Separation of political and commercial objectives is seen as best-practice and has been adopted by many countries around the world. However, this can have the effect of constraining the shareholder’s ability to engage with the company and drive value creation (and in particular some companies have tried to use these practices to keep the Crown as

shareholder out of discussions where the Crown should legitimately be involved).

21. Both NZSF and ACC naturally recycle capital – if they sell an investment, the proceeds are retained within their funds and then reinvested into new investments, and the basis for the sale (and reinvestment) is to grow value. This is well understood by the general public. The Crown, by contrast, has struggled to communicate the merits of recycling, where this has meant selling commercial investments and investing the proceeds in social assets.

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Which companies could benefit from a partial transfer to CFIs?

22. We consider that benefits set out above would apply to any of the companies in our commercial portfolio that have purely commercial objectives, and are not already mixed-ownership companies.

23. Where companies have mixed objectives, or are not financially self-sustaining, introducing an outside shareholding interest will carry potential conflicts of interest that are likely to outweigh the benefits. The CFIs will also not be interested in investing in entities that don’t generate a commercial return without government support.

24. The table below shows the entities which we think should not be considered for partial transfer to the CFIs, along with a brief description of the reason why:

Entities Rationale for exclusion

Mixed ownership electricity companies Already in mixed ownership so unlikely to (Mercury NZ, Meridian Energy, Genesis be material gains from inclusion; CFIs Energy) already have the ability to invest up to 10%, and have never got close to this limit

Air New Zealand Already in mixed ownership so unlikely to be material gains from inclusion; CFIs already have the ability to invest

KiwiRail Reliant on government support

Housing NZ, Tamaki Regeneration, Mixed objective entities Crown Research Institutes, REANNZ

Special purpose vehicles (e.g. Crown Mixed objective or finite-life entities Irrigation, Crown Fibre)

Lotteries Commission Policy entity; no commercial value (given charitable distributions)

NZ Venture Investment Fund Not generating a commercial return on current settings; future of NZVIF currently being considered

25. If these entities are excluded, then the potential scope for a follow-on to the Kiwibank transaction is 15 companies with a total equity value of around $4.2 billion (including NZ Post, but not including the value of NZ Post’s shareholding in Kiwibank).

26. Around 70% of this equity amount is in the two largest companies, Transpower and Landcorp. Attached as an appendix is a list of these 15 entities, including their commercial value and the legislative framework they operate under.

27. As an aside, this illustrates the decreasing size and relevance of SOEs for the Crown’s balance sheet, and even their relevance within the Crown’s portfolio of commercial, financial or mixed objective entities. The total value of the entities in this portfolio is around $100 billion (including the CFIs) of which around 4% is entities potentially suitable for part-transfer to the CFIs.

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28. It also illustrates some of the costs of holding these entities. The amount of Ministerial and officials’ time devoted to these 15 companies would be significantly more than that allocated to the mixed ownership companies, or the much larger CFIs. The graph on the next page illustrates one component of the performance gap, dividend yields.

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Options for mixed ownership

29. There are currently a number of different mixed ownership models operating in the commercial portfolio:

• Air New Zealand is a listed company with ~52% ownership by the Crown.

• The three mixed ownership model (MOM) electricity companies are listed companies with a legislated minimum 51% ownership by the Crown (currently, Crown ownership is on average 51.4%).

• Kiwibank is ultimately 100% owned by the Crown, with 55% of its shares currently owned by NZ Post, 25% by NZSF and 20% by ACC1. The company is subject to an RFR which requires the CFIs to offer their shares back to the Crown before selling.

• The Crown owns shares in Christchurch Airport (25%), Dunedin Airport (50%) and Hawkes Bay Airport (50%). The Crown is currently selling its interests in a number of smaller, uncorporatised joint venture airports, in a process led by the Ministry of Transport.

30. As noted above, Treasury’s view is that publicly listed companies with a wide range of shareholders and monitoring probably have the best incentives to perform. A tightly held, hands-on, private equity model might be better, but this is difficult to achieve while maintaining the separation between commercial and non-commercial objectives that underpins NZ’s SOE framework.

31. While the quality of market monitoring may vary, particularly for smaller or less liquid companies, a listed company is required to interact with its owners in public, and the share price provides a daily public indicator of performance. There is also the ability for existing shareholders to exit and new shareholders to invest. Listed companies are able to much better align the interests of executives with those of shareholders, and thus attract good talent (the electricity companies saw this as a very significant benefit of the MOM process).

32. Introducing a minority owner without making the company publicly listed will provide a different set of benefits. Owners are able to access inside information from the company and may have a deeper knowledge and interest than market monitoring would provide. On the other hand, the success of this approach will depend very much on the skills and engagement of the minority owner, which may vary over time, and on the alignment of interests between the majority and minority owners.

33. Sharing ownership with local authorities increases the extent to which companies are likely to be subject to conflicting objectives (e.g. profitability versus regional development) and in our view this model does not usually provide good commercial incentives, or a good commercial return.

34. In the discussion that follows, we have assumed that any policy change would be primarily aimed at enabling the CFIs to become minority shareholders. However, the option of opening up minority ownership to a wider range of participants also exists.

1 s9(2)(b)(ii), s9(2)(i) and 9(2)(ba)(i)

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How does existing legislation constrain mixed ownership options?

35. Legislation was not required for the Kiwibank transaction, as Kiwibank is a subsidiary of NZ Post. In principle, SOEs can sell some or all of their shareholdings in their subsidiaries, and this has happened many times since the SOE Act was created in 1986. However there are limitations on SOE’s selling subsidiaries, although those limitations are not well defined.

36. The Crown’s shareholding in three airports and in Schedule 4A companies can also be sold without any legislative change (although other parties have rights of first refusal for the airports which would need to be complied with). However there is only one relevant Schedule 4A company (Fairway), it is very small, and alternative ownership options for it are already under consideration (although these options may not proceed).

37. Thus of the 15 companies that could be partially transferred to the CFIs, 9 are SOEs and two Crown Entities (see Appendix 1). Without legislative change, only Ministers may own shares in SOEs and Crown Entity companies.

38. This means implementing a mixed ownership-style transaction, either with the CFIs or with any other party, would involve:

• consultation with Maori, and then depending on the outcome of that consultation, • passing legislation to remove the entities from the SOE Act or the Crown Entities Act.

39. Although we have not included Air NZ in our list of companies for potential sale to the CFIs, there is no legislative requirement for the Crown to maintain a minimum level of shareholding in Air New Zealand. However the Government has stated it will retain a 51% minimum ownership stake, and Air NZ’s international air rights may depend on majority New Zealand ownership (but not necessarily Crown ownership)

Consultation with Māori

40. As with the mixed ownership model, moving companies out of the SOE Act would require consultation with Māori on whether this was consistent with the principles of the Treaty of Waitangi (section 9 of the SOE Act). This consultation was undertaken successfully when the MOM companies were moved out of the SOE Act. While this would probably not involve a significant monetary cost, it would take time and could give rise to unexpected issues.

41. We think it is highly likely that the outcome of this consultation would, at a minimum, require the Crown’s obligations under the existing Treaty principles clause and the memorial land title provisions in the SOE Act to be carried over and apply to any new legislation governing the Crown’s ownership of the companies (as was done for MOM companies).

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Legislative options

42. There are three broad approaches, depending on Ministers’ appetite for pursuing a policy that would extend minority mixed ownership in the Crown’s commercial portfolio.

Option One: No legislative change

43. There are a number of options to achieve some or all of the intended benefits from the Kiwibank transaction (i.e. capital recycling, access to equity and improved commercial performance) while not specifically providing for a partial sale to CFIs. These include:

• the Crown selling its shareholdings in the airports: ­ for Hawkes Bay Airport, to the other council shareholders, or to the local iwi as part of its Treaty settlement (which has an option to purchase the Crown’s shares within two years from settlement) ­ for Dunedin and Christchurch Airports, to the local councils and/or Ngai Tahu s9(2)(b)(ii), s9(2)(i), s9(2)(j) and ­ we are in discussions with 9(2)(ba)(i) s regarding options for the Crown’s 25% shareholding in Christchurch airport, and will report to you early in 2017. • the Crown reducing its 52% shareholding in Air New Zealand • the Crown selling some or all of its shares in Schedule 4A companies (although only one company, Fairway, is suitable for a sale,s9(2)(j)and and a management buyout option is currently being developed by the company)s9(2)(h) • companies selling subsidiaries or assets (there are a number of examples where this is already happening: Landcorp selling farms as part of its normal business; the Solid Energy voluntary administration process; s9(2)(b)(ii), s9(2)(i), s9(2)(j) and 9(2)(ba)(i) s9(2)(b)(ii), s9(2)(i), s9(2)(j) and RNZ selling its Auckland office building) 9(2)(ba)(i) • selling equity sbonds in SOEs under section 12 of the SOE Act.

44. None of these options require legislative change, although there are difficult and unclear boundary issues regarding the sale of subsidiaries or assets, which we think would significantly restrict the scope of this option2. There are also issues relating to Air New Zealand’s international landing rights which would require further consideration.

45. SOE equity bonds require authorisation by a resolution of the House of Representatives. In our view SOE bonds are inferior to part-sale of ordinary shares to the CFIs, because they do not replicate the rights and obligations attached to ordinary shares, and therefores9(2)(i), do not create the same incentives on SOEs. We do not propose to do any further works9(2)(j) on this option. and 46. These options would9(2)(ba)(i) not provide for any further transactions involving the CFIs. The value of potential transactions would only be marginal for the portfolio as a whole, with a potential exit from the 25% shareholding in Christchurch airport, or a reduction in the Crown’s shareholding in Air NZ the only material transactions.

2 s9(2)(h)

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Option Two: Legislative change that targets one company at a time

47. Transpower and Landcorp are the two most valuable companies in the commercial unlisted portfolio.

48. We think the single most value-adding option would be to make Transpower a mixed ownership model company, by passing legislation removing it from the SOE Act and adding it to Schedule 5 of the Public Finance Act, and then carrying out an initial public offering for up to 49% of Transpower’s shares. As discussed above, before doing this the government would need to consult with Maori, as it did before the share offers for the three electricity companies.

49. We believe Transpower, as a regulated monopoly, would be very well suited to the mixed ownership model. There is already a mixed ownership, listed equivalent of Transpower in Vector, the Auckland lines company, which is 75% owned by a consumer trust and 25% by private shareholders.

50. Other privately owned New Zealand businesses regulated by the Commerce Commission include Chorus, Auckland and Wellington International Airports, Fonterra, three gas distribution businesses and one gas transmission business.

51. Privately owned regulated monopolies are also common overseas, including in Australia. For example, the West Australian state government recently announced it was selling 51% of Western Power, its equivalent of Transpower.

52. We believe Transpower as a MOM company would deliver better outcomes for the Crown than part-ownership by the CFIs, and so this would be our first-best advice.

53. Part-ownership of Transpower by the CFIs would not preclude the option of making it a MOM company at a later date, with the Crown and/or the CFIs offering some of their shares to the public. This is what NZ Super Fund and Infratil did with Z Energy.

54. We think Landcorp is less suitable for the mixed ownership model than Transpower, particularly given iwi interest in some Landcorp farms, and there are alternative, less complex options (e.g. sale of individual farms, which Landcorp is already doing).

Option Three: Broad review of legislation

55. The government would need to pass legislation to enable a policy of extending minority mixed ownership by the CFIs to some or all SOEs and commercial Crown Entities.

56. This would mean creating a new legislative framework, or amending the Crown Entities Act, as none of the other existing frameworks would be suitable:

• the SOE Act is based around 100% ownership by shareholding Ministers and would be complex to amend to allow CFI shareholdings • the Crown Entities Act also requires 100% ownership of Crown Entity companies • the mixed ownership model legislation (Part 5A of the Public Finance Act) is designed for listed companies, and limits any other shareholder in those companies to at most a 10% shareholding • Schedule 4A of the Public Finance Act does not have a Treaty clause (which we believe would need to be carried over from the SOE Act) and we do not think it would be appropriate to add a Treaty clause to Schedule 4A, as then it would apply to the existing 4A companies

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57. There would be a range of options for a new framework, but the options at either end of the range would be:

• (narrowest option) a new framework specifically for joint shareholdings of companies between the Crown and the CFIs. • (broadest option) a more comprehensive set of amendments to the Crown Entities Act, and potentially the repeal of the SOE Act.

58. The narrow option could be modelled on Schedule 4A of the PFA (e.g. create a “Schedule 4B”) with the Treaty and land titling clauses carried over from the SOE Act to apply to the former SOEs, and the relevant sections of the Crown Entities Act applying as they do for Schedule 4A companies.

59. As with Schedule 4A, Ministers would be permitted to own less than 100% of Schedule 4B companies. SOEs or Crown Entities would be removed from the SOE Act or Crown Entities Act and added to the new Schedule 4B, allowing the government to transfer some of the shares in the companies to the CFIs (while retaining 100% Crown ownership, since the Crown owns the CFIs).

60. The broad option could create more flexibility in ownership arrangements, by consolidating some of the existing commercial frameworks, and providing a mechanism for commercial companies to move between different ownership categories.

61. This would involve amending the Crown Entities Act so that it allowed for the Crown to own less than 100% of a designated class of Crown Entities, and allowed the government to sell some of the shares in these Crown Entities to the CFIs. Some or all SOEs would then be moved out of the SOE Act and into the amended Crown Entities Act, with the relevant parts of the SOE Act (e.g. the principles of the Treaty and land titling provisions, and perhaps the overarching commercial objective) incorporated into the Crown Entities Act to apply to the former SOEs (whether 100% owned by the Crown or part-owned by the CFIs).

62. The broad option would have the benefits of:

• a consistent and flexible framework for Crown ownership of commercial entities • allowing for Crown Entities to be moved into, or out of, the sub-category that allowed for CFI part-ownership, without passing new legislation for each entity • avoiding the creation of a sixth legislative ownership framework • allowing the Public Finance Act to focus solely on public finance, and not have commercial ownership frameworks embedded within it.

63. If all SOEs were moved into the CE Act (either as 100% Crown-owned entities, or “mixed ownership” entities with the CFIs) then the SOE Act could be repealed. Schedule 4A of the PFA could also potentially be repealed and all of these companies included in the amended CE Act. This would reduce the five existing commercial ownership frameworks to three (as shown in the diagrams in appendix 2)3.

3 The mixed ownership model framework could be included in an amended Crown Entities Act, but care would need to be taken to avoid changing any of the existing MOM provisions, as this might disadvantage minority shareholders.

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64. We have not consulted with the State Services Commission (SSC) yet. If Ministers wished to pursue legislative change, then SSC would need to be involved given the Commissioner’s statutory responsibility for machinery of government issues and the SSC’s responsibility for administering the Crown Entities Act other than Part 4.

65. Legislative change (either the narrow or the broad option), would enable the partial transfer of shares in any commercial company to CFIs. The companies most suited to this approach would be:

• Transpower • Airways • AsureQuality, and • Kordia.

66. s9(2)(b)(ii), s9(2)(i),s9(2)(j) and 9(2)(ba)(i)

Rights of first refusal

67. As you are aware, the Kiwibank transaction includes a set of rights for the Crown to purchase shares in Kiwibank from NZSF and ACC if (or when) they choose to sell their shares. This is intended to keep Kiwibank in 100% Crown ownership, should the government wish to do so when the CFIs want to sell.

68. A key choice would be whether to extend this RFR to other entities where some shares were transferred to the CFIs. This could either be done contractually (as it was for Kiwibank) or as part of the legislative framework.

69. Having an RFR, and in particular a legislative RFR, would weaken the advantages of the transaction for the Crown. This is because it implies the transaction may be reversed at some point – meaning the government would need to recycle capital away from the core Crown to the CFIs, at a time chosen by the CFIs; and the entity would once again be in 100% direct Crown ownership, losing the ongoing performance gains that are expected to come from CFI shareholding.

70. A legislative RFR would restrict the CFIs from selling their shares to other parties, and so would reduce the price they would be willing to pay the Crown.

71. Our first-best advice would be to not have any such rights – i.e. give the CFIs the ability to sell their minority shareholdings of the entities into private ownership.

72. With no RFR, the legislative framework would need to give the Crown the ability to sell shares in the relevant companies to the CFIs, but not restrict the CFIs from selling those shares to third parties, when they chose to.

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Transaction costs

73. Transaction costs for the Kiwibank transaction (mostly due diligence by NZSF and ACC) were around $5m, which is around 1% of the transaction’s value. If Ministers wished to proceed, we would look at options for reducing transaction costs.

74. One option would be for the Crown to engage an external party to carry out vendor due diligence on the companies. The scope of the due diligence review and the selection of the external party could be agreed with the CFIs. The due diligence report would be provided to the CFIs, and the external party would then provide a warranty to the Crown and the CFIs on the quality of its due diligence report. In theory this would significantly reduce the need for the CFIs to carry out their own due diligence.

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Appendix 1 – list of entities potentially suitable for partial sale to the CFIs

Entity Type Equity value ($m)

Transpower SOE 1,500

Landcorp SOE 1,410

Christchurch Airport (25% share) Council-controlled entity 298

TVNZ Crown Entity company 230

Airways SOE 211

AsureQuality SOE 194

Kordia SOE 140

Public Trust Statutory Crown Entity 70

Metservice SOE 58

Quotable Value SOE 24

Dunedin Airport (50% share) Council-controlled entity 23

Hawke’s Bay Airport (50% share) Council-controlled entity 9

Fairway Resolution PFA Schedule 4A company 5

Animal Control Products SOE 4

NZ Post (excluding Kiwibank) SOE ~0

Total (15 entities) 4,178

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Appendix 2

Current legislative ownership frameworks

PFA Sch. 4A MOM Crown entity SOE Air NZ company company

Crown entity Statutory entity company

Crown CRI Public ACE ICE agent Finance Act CRI Act Public Crown Entities Act SOE Act Finance Act

Establishing legislation (e.g. Housing Corp Act, TVNZ Act) Companies Act and constitution

1

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Possible amended frameworks

MOM company Crown entity Air NZ (51%+ ownership)

Statutory entity Crown entity company (100% ownership) (1-100% ownership)

Crown Sch. 4A Ex-SOE CRI Other agent ACE ICE

Treaty CRI clause Act Crown Entities Act Public Finance Act

Establishing legislation (e.g. Housing Corp Act, TVNZ Act) Companies Act and constitution

3

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Treasury Report: TVNZ: update

Date: 10 February 2017 Report No: T2017/221 File Number: CM-1-3-78-2

Action Sought

Action Sought Deadline Minister of Finance Note contents of the report 3 March 2017 (Hon Steven Joyce) Meet with Treasury to discuss what Ministers wish to achieve from ownership of TVNZ Reschedule the meeting with TVNZ that did not go ahead in December (with the previous shareholding Ministers) Minister of Communications Note contents of the report 3 March 2017 (Hon Simon Bridges) Meet with Treasury to discuss what Ministers wish to achieve from ownership of TVNZ Reschedule the meeting with TVNZ that did not go ahead in December (with the previous shareholding Ministers) Associate Minister of Finance Note contents of the report 3 March 2017 (Hon Amy Adams)

Contact for Telephone Discussion (if required)

Name Position Telephone 1st Contact s9(2)(k) Juston Anderson Principal Advisor, s9(2)(a)  Commercial Advice

Angela Graham Manager, Commercial Advice

Actions for the Minister’s Office Staff (if required)

Return the signed report to Treasury.

Note any feedback on the quality of the report

Enclosure: No

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Treasury Report: TVNZ: update

In December last year we provided a report on TVNZ to the previous shareholding Ministers, ahead of a scheduled meeting with the Chair and CEO, which subsequently did not go ahead (T2016/1164 refers).

We are resubmitting the report as the issues it covers are still relevant. We have updated the report with figures from TVNZ’s quarter 2 report to Ministers, which were not materially different from quarter 1 and so do not change our advice. We would like to meet with you to discuss this report, and we suggest you reschedule the meeting with the Chair and CEO of TVNZ.

Executive Summary

This report provides the shareholding Ministers of Television New Zealand Ltd (TVNZ) with an update on developments in the media market and the potential implications of these developments for TVNZ. This report also highlights that TVNZ’s current business model, which has in the past been profitable, is unlikely to be so in the future, and is in the Treasury’s view unsustainable.

TVNZ has three core objectives under the Television New Zealand Act 2003 (the TVNZ Act), which are to provide a commercial return, quality content (including New Zealand content) and provision of TV channels free of charge. While in the past advertising revenues have been sufficient to allow TVNZ to achieve all three objectives, broadcast television advertising revenues are in decline, and TVNZ is now forecasting it will not meet its commercial objective.

Although TVNZ is looking for opportunities to further reduce its costs, the company has advised in its most recent quarterly report that some form of structural intervention will be required for long-term sustainability. Under current settings, TVNZ’s revenue and profitability is in a long-term decline and the Treasury does not see TVNZ’s financial position improving. This means that without structural change, Ministers would eventually need to provide ongoing operating funding for TVNZ to continue broadcasting.

From a public policy perspective it is unclear what TVNZ provides that could not be provided through other delivery options. However, the Ministry for Culture and Heritage’s (MCH’s) preliminary view is that TVNZ remains important to keeping the contestable funding model, via NZ On Air, viable; and that, despite its commercial remit, TVNZ serves a more diverse audience demographically than strictly commercial considerations would dictate. Further work with MCH needs to be undertaken to assess the importance of TVNZ in making the New Zealand content available, and whether the content could be provided through other delivery options.

Given the concern about the future commercial viability of TVNZ, in our view it is important that the shareholders of TVNZ are clear about what they wish to achieve through ownership of the company, and in particular what functions, if any, they wish to retain. This may require consideration of changes to broadcasting policy settings. We recommend that shareholding Ministers consider alternative ways in which the functions under the TVNZ Act could be delivered, if those functions continue to be considered necessary. We also suggest shareholding Ministers define the boundaries of what options for TVNZ would or would not be acceptable.

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Potentially, the highest value commercial option for the shareholders of TVNZ would be to sell the company. This is because potential buyers would likely include other media companies that may be able to achieve synergies and cost savings, for example though the vertical integration of media assets, i.e. combining print, radio, online and television assets.

Ultimately if TVNZ’s revenues continue to decline (TVNZ’s revenue has declined in nominal terms by 17% over the past eight years), at some point in the future Crown support will be required for the business to continue to operate. s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i) s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i) s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i) Currently New Zealand has a competitive model for funding local content via NZ on Air. To provide direct support to TVNZ could undermine the current competitive funding model and the competitive neutrality of the existing arrangements, given that TVNZ has privately owned direct competitors.

Technological change has fundamentally transformed free-to-air (FTA) television with domestic FTA television companies now competing with global large scale online competitors such as YouTube, Netflix, Google and Facebook for viewers, content and advertising dollars.

The competitive response in the New Zealand market includes the proposed Fairfax NZME merger and the Sky Vodafone merger. If approval to these mergers is given, the consolidated entities are likely to be better placed to compete for viewers/readership and advertising revenues. Even if approval is not given, the status quo will not hold – the four companies will all look to alternative options for restructuring their businesses. The Fairfax CEO was reported to have said it becomes “end game” if the merger with NZME is not approved. Industry consolidation is likely to reduce the opportunities for TVNZ to improve its own outlook.

Constraining the ability of TVNZ to participate in industry consolidation and/or to partner with other commercial entities could further limit TVNZ’s ability to respond to market conditions, further reduce the commercial value of the company, and potentially restrict the public policy options available to Ministers in the future. Without a clear future direction it may be difficult to retain talent within the organisation. s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i)

The Chair and CEO of TVNZ are likely to request a meeting with shareholding Ministers to discuss these issues. TVNZ will prepare a presentation for that meeting, which we will provide you with as soon as it is available. It is likely that your support for TVNZ’s strategic direction will be sought at the meeting.

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Recommended Action

We recommend that you: a note under current policy settings TVNZ’s revenue and profitability is in a long-term decline and Treasury does not see TVNZ’s financial situation improving s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i)

c note if TVNZ’s revenues continue to decline, at some point in the future, Crown support will be required for the business to continue to operate, and that based on TVNZ’s current forecasts this could be as soon as 2021 d note from a public policy perspective it is unclear what TVNZ provides that could not be provided through other delivery options e note the highest value commercial option for the shareholders of TVNZ would likely be the sale of the company. This is because potential buyers would likely include other media companies that may be able to achieve synergies and cost savings, for example through the vertical integration of media assets, i.e. combining print, radio, online and television assets f note currently New Zealand has a competitive model for funding local content via NZ on Air. To provide direct support to TVNZ could undermine this competitive funding model and the competitive neutrality of the existing arrangements, given TVNZ has privately owned competitors, and g meet with Treasury to discuss what Ministers wish to achieve from ownership of TVNZ h reschedule the meeting with the Chair and CEO of TVNZ that did not go ahead in December to discuss these issues

Juston Anderson Principal Advisor, Commercial Advice

Steven Joyce Hon Simon Bridges Minister of Finance Minister of Communications

Hon Amy Adams Associate Minister of Finance

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Treasury Report: TVNZ: update

Purpose of Report 1. This report provides Ministers with an update on developments in the media market and the potential implications of these developments for TVNZ. This report also highlights that TVNZ’s current business model, which has in the past been profitable, is unlikely to be so in the future.

2. TVNZ is currently forecasting that it will not be able to fully meet its functions under the TVNZ Act. We do not see this situation improving and therefore we invite Ministers to discuss with Treasury and MCH what they wish to achieve from ownership of TVNZ.

3. We also recommend that Ministers consider alternative ways in which the functions under the Act could be delivered, if considered necessary. We suggest that shareholding Ministers define the boundaries of what options for TVNZ would or would not be acceptable.

An Evolving Free-to-Air Market 4. Competition in FTA broadcast television market began in 1989 when the first privately owned free to air television network, TV3, debuted. Shortly after, competition for viewers increased when pay television entered the market in 1990, with the introduction of Sky Television (SKY NZ).

5. As a commercial entity TVNZ has embraced competition and in the last ten years paid $65m in dividends to the Crown. However, since opening FTA television to competition, other New Zealand FTA broadcasters have struggled to remain financially viable as evidenced by receiverships in 1990 and 2004, and the recent capital injection by Oaktree Capital into MediaWorks.

6. While historically TVNZ has been commercially successful, the New Zealand market for viewers is increasingly crowded, with a broad range of online content offerings available across an ever-growing number of distribution platforms and devices. Daily audience concentrations

Source: NZ On Air: Where are the audiences? 2016 (Glasshouse Consulting)

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7. Although linear TV continues to reach large audiences in New Zealand (2.7m viewers per day including 2.2m viewers watching TVNZ’s channels), linear TV viewership is in decline, as TVNZ’s core audience age viewers are not being replaced by the next generation of viewers. By contrast digital media consumption is increasing. Viewers are increasingly able to access content specifically aligned to their viewing preference making FTA television, and in particular broadcast television, less relevant.

FTA Going Global and Online 8. Historically the FTA television market was the domain of broadcast national television (sometimes regional television stations). However, technological change has fundamentally transformed the FTA market. Now domestic FTA television companies compete with global large scale online competitors such as YouTube, Netflix, Google and Facebook for viewers, content and advertising revenue.

9. Technology has also impacted the way we access content with over 90% of New Zealand households having internet connections, New Zealand’s high rate of smartphone ownership (>70%), and through higher speed internet connections, online content has also become more accessible.

Expanding Pay TV Options 10. While access to FTA content has been enhanced by online distribution, so too have viewer’s pay TV options. Pay TV is now easily accessible to a large proportion of New Zealand’s population. Moreover, bundled low cost pay TV options, which allows content to be catered to the viewer’s preferences, now compete more directly with what was the traditional FTA television audience.

11. The increase in pay TV options has also impacted SKY NZ which is losing its dominant hold on premium content with the introduction of online streaming video services such as Netflix and Lightbox. However, SKY NZ still holds extensive long term exclusive rights to premium sports content for New Zealand (including NZ Netball, Olympics, NZ Cricket, NZ Rugby and the NRL).

12. Like TVNZ’s financial return, the financial returns of MediaWorks and SKY NZ have been under pressure from the increased competition for viewers, with advertising revenues following viewers (or even ahead of viewers, as media agencies make higher margins from digital). On 26 August 2016 Sky NZ announced its annual results with its NPAT for the year of $147m being below the lower end of its forecast range of $153m, and down from $172m last year. SKY NZ’s EBITDA was also down 14% on last year reflecting cost pressures and flat subscription growth.

New Zealand Media Market Consolidation 13. Local players are responding to the challenging market conditions by seeking to consolidate to both improve the legacy economics through cost synergies and achieve greater combined online scale. TVNZ has already reduced its total cost base since FY12 by approximately 15% and further cost-cutting is underway.

14. On 27 May 2016 Fairfax Media New Zealand Ltd and Wilson & Horton Ltd (trading as NZME) made an application to the Commerce Commission seeking its approval to merge their New Zealand operations (“the Fairfax NZME merger” also referred to as the “StuffME” merger, in a quickly deleted tweet from the Commerce Commission).

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15. The Fairfax NZME merger would see the print, online and radio assets combined in one entity and was described in the submission to the Commerce Commission as the:

“…response to the dramatically transforming media landscape. The media industry has been subject to exponential change over the last five years and this is set to continue, with print readership and revenue in decline and revenue from online news/information provision becoming highly competitive.”

16. On 9 June 2016 Sky NZ and Vodafone Group Pic (Vodafone NZ) announced their intension to merge operations via SKY purchasing the shares of Vodafone NZ for $3,437m (“the Sky Vodafone merger”). The merger would create an integrated telecommunications and media group, with the largest market share in mobile and pay TV. A key focus of the transaction, as announced, was the net present value of estimated cost savings of $850m.

17. While the proposed media consolidations still require Commerce Commission approval (and the Commission’s preliminary decision has been to decline the Fairfax NZME merger) the merger activity itself is a commercial response to competitive pressures with the New Zealand media industry and evidence that doing nothing is not a viable option for entities looking to protect and enhance shareholder value.

18. If approval to the mergers does eventuate, the consolidated entities are likely to be better placed to compete for viewers/readership and advertising revenues. Consistent with this TVNZ notes in its submission to the Commerce Commission on the Sky Vodafone merger that:

“The proposed merger of Sky and Vodafone will accelerate the degradation of FTA platforms by creating an entity with the ability and incentive to acquire content rights for premium sport and entertainment in a single bundle across FTA, Pay TV, SVOD [subscription video on demand] and TVOD [transaction video on demand], making it even more uneconomic for a standalone FTA provider such as TVNZ to acquire premium content for FTA alone, or for telecommunications companies to acquire VOD rights alone.”

19. Even if approval is not given, the status quo will not hold – the four companies will all look to alternative options for restructuring their businesses. The Fairfax CEO was reported to have said it becomes “end game” if the merger with NZME is not approved.

20. Industry consolidation may also reduce the opportunities for TVNZ to improve its own outlook. Constraining the ability of TVNZ to participate in industry consolidation and/or to partner with other commercial entities could further limit the ability of TVNZ to respond to markets conditions and further reduce the commercial value of the company. It could also potentially restrict the public policy options available to Ministers in the future and without a clear future direction, make it difficult to retain talent within the organisation.

TVNZ’s Forecast Performance

21. Although TVNZ has performed well as a commercial entity, major industry trends threaten the company’s profitability and ultimately the value of the Crown's investment in the company, currently $230m. Over the last eight years TVNZ’s revenue has declined in nominal terms 17% and in real terms approximately 30%. In Treasury’s view TVNZ’s current business model is unsustainable.

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Source: TVNZ Q2 FY2017 report

22. For the first half of FY17, PWC’s network share figures show that TVNZ’s share of network revenues had increased to 62.6% (from 61.1% in the same period last year). Despite TVNZ market share being at an unprecedented level, total market revenues were down 8.4% from the same period last year, with TVNZ's revenues down 6.1%. s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i)

24. TVNZ’s online revenue growth has not kept pace with broadcast advertising revenue decline. This is because TVNZ holds a greater than 60% revenue share of the broadcast market and a single digit share of the online market, which is dominated by large global entrants (e.g., Google, YouTube in video and Facebook in news, which jointly take 80-85% of digital advertising revenues). Further, digital models rely on scale as they re-set the revenue-generating potential to a lower level (per unit audience). As online scale grows and more content is traded using automated platforms, the value of this content will commoditise further, benefiting global players with effectively infinite inventory, over local sub-scale online players. s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i)

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COMMERCIAL-IN-CONFIDENCE s9(2)(b)(ii),s9(2)(i)and 9(2)(ba)(i)

26. Although there may be opportunities in the future for TVNZ to slow the rate of which revenues are being lost, TVNZ will never have the scale of its other international FTA content providers (such as YouTube, Google and Facebook) and pay TV competitors. Therefore TVNZ will not have the advertising reach or the ability to spread content costs to the same extent.

27. Ultimately if TVNZ’s revenues continue to decline, at some point in the future Crown support will be required for the business to continue to operate. This could be as soon as 2021. Currently New Zealand has a competitive model for funding local content via NZ on Air. To provide direct support to TVNZ could undermine the current competitive funding model and the competitive neutrality of the existing arrangements, given that TVNZ has privately owned direct competitors.

TVNZ’s Functions 28. Given the concern with respect to the future commercial viability of TVNZ, in our view, it is important that the shareholders of TVNZ are clear about what they wish to achieve through ownership of the company, and in particular what functions, if any, they wish to retain.

29. Under section 12 of the TVNZ Act: “(1) The functions of TVNZ are to be a successful national television and digital media company providing a range of content and services on a choice of delivery platforms and maintaining its commercial performance. (2) In carrying out its functions, TVNZ must provide high-quality content that— (a) is relevant to, and enjoyed and valued by, New Zealand audiences; and (b) encompasses both New Zealand and international content and reflects Māori perspectives. (3) TVNZ's services must include the provision of channels that are free of charge and available to audiences throughout New Zealand.” T2017/221 : TVNZ: update Page 9

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30. While in the past advertising revenues have been sufficient to allow TVNZ to achieve all three objectives, as already noted broadcast television advertising revenues are in decline, and TVNZ is now forecasting it will not meet its commercial objective.

TVNZ is not Forecast to Fully Meet its Functions Under its Act 31. Signs of TVNZ not meeting its objectives are evident by its forecast financial performance. s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i) s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i)

32. The forecast return on equity is well below TVNZ’s cost of capital. Arguably over the forecast period TVNZ will be effectively receiving a capital subsidy from its shareholders. Moreover, given the low forecast return on equity, careful consideration needs to be given by the company to what capital expenditure is absolutely necessary to protect or increase the value of the existing investments.

NZ On Air’s Funding Goes to Produce Content Rather than to Screen Content 33. TVNZ’s functions under the Act do not include the provision of public broadcasting, although many of NZ On Air’s most popular funded programmes are broadcast by TVNZ.

34. The provision of public broadcasting is managed by the Ministry for Culture and Heritage (MCH) and funded by the public broadcasting appropriation. In 2014/15 NZ On Air received $128.7m in Crown funding, of which $86.3m was allocated to the production of screen content with the remainder of the funding principally going to fund public radio. The largest part of the screen content funding went towards contestable content production of $80.5m.

35. In 2014/15 TVNZ received $2.5m (2.9% of the contestable funding) from NZ On Air to produce content ($0.6m funded Back Benches which airs on Prime). MediaWorks received $5.4m from the contestable fund. However 18 of the top 20 NZ On Air’s programmes in 2014/15 were screened on TVNZ (this reflects TVNZ market reach).

36. While TVNZ plays a small role in the production of New Zealand content, further work with MCH needs to be undertaken to assess the importance of TVNZ in making the New Zealand content available, and whether the content could be provided through other delivery options.

TVNZ’s Response to Market Pressures s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i)

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s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i)

38.

s9(2)(b)(ii), s9(2)(i), and 9(2)(ba)(i) In addition we think TVNZ should also focus on the company's cost structure, its investment, asset utilisation and its optimal content mix (to be attractive to viewers and advertisers). TVNZ could also focus on ways of reducing the amount of Crown capital invested in the company (and therefore at risk).

39. From a public policy perspective it is unclear what TVNZ provides that could not be provided through other delivery options. We recommend that shareholding Ministers consider alternative ways in which the functions under the TVNZ Act could be delivered, if those functions continue to be considered necessary. We also suggest that shareholding Ministers define the boundaries of what options for TVNZ would or would not be acceptable.

40. Potentially, the highest value commercial option for the shareholders of TVNZ would be to sell the company. This is because potential buyers would likely include other media companies that may be able to achieve synergies and cost savings, for example though the vertical integration of media assets, i.e. combining print, radio, online and television assets.

41. The Chair and CEO of TVNZ were to meet with the previous shareholding Ministers in December last year, and are likely to request a meeting with the new shareholding Ministers shortly. TVNZ will prepare a presentation for that meeting, which we will provide you as soon as it is available. It is likely that your support for TVNZ’s strategic direction will be sought at the meeting and that Ministers will be requested by TVNZ to be clear about what options they do not support.

Consultation with the Ministry for Culture and Heritage 42. In preparing this paper we met with MCH officials to discuss their view of the future of TVNZ and implications for public broadcasting. MCH indicated to us that they wished to do further work on this issue.

43. MCH’s preliminary view is that TVNZ remains important to keeping the contestable funding model, via NZ On Air, viable; and that, despite its commercial remit, TVNZ serves a more diverse audience demographically than strictly commercial considerations would dictate, and this is reflected in the range of NZ On Air content that it carries, both for mainstream and more specialised audiences, compared with other broadcasters or platforms.

44. Treasury supports the view that consideration of the contestable funding model is necessary, although further work with MCH needs to be undertaken to assess the importance of TVNZ in making the New Zealand content available, and whether the content could be provided through other delivery options.

45. The one advantage that TVNZ does have in the local market, which its international FTA competitors do not have, is the uniquely New Zealand content. It is not clear that any alternative owner would want to give up this point of difference.

46. In addition, further consideration could be given to the importance of having New Zealand content accessible (i.e. on the internet) versus the necessity to broadcast the content.

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Treasury Report: Christchurch Airport Shareholding

Date: 16 February 2017 Report No: T2017/269 File Number: CM-1-3-4-1

Action Sought

Action Sought Deadline Minister of Finance Discuss at the meeting scheduled 3.00pm, Tuesday 21 February for Tuesday 21 February 2017 (Hon Steven Joyce) Minister for State Owned Discuss at the next meeting with 3.30pm, Monday 20 February Enterprises Treasury officials 2017 (Hon Todd McClay)

Contact for Telephone Discussion (if required)

Name Position Telephone 1st Contact Jen Johnson Graduate Analyst s9(2)(k) s9(2)(a) 

Angela Graham Manager, Commercial Advice

Actions for the Minister’s Office Staff (if required)

Return the signed report to Treasury.

Note any feedback on the quality of the report

Enclosure: Yes (attached)

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Treasury Report: Christchurch Airport Shareholding

Purpose of report

1. Treasury has been approached by s9(2)(b)(ii), s9(2)(i), s9(2)(j) and 9(2)(ba)(i) s9(2)(b)(ii),s9(2)(i) s9(2)(j)and 9(2)(ba)(i) wish to test whether the Crown is interested in exploring a sale of its 25% shareholding in CIAL to s9(2)(b)(ii), s9(2)(i), s9(2)(j) and 9(2)(ba)(i) 2. In principle, Treasury would support such a sale. In our view: • there is no public policy reason for the Crown to hold shares in CIAL

• owning a minority stake does not provide the level of control necessary to ensure good commercial performance, and

• a sale would permit the capital invested in the business to be recycled to higher priority areas.

3. s9(2)(i) and 9(2)(j)

4. This note asks Ministers to consider issues and risks associated with the proposal. If you wish Treasury to continue to explore the viability of a transaction, our proposed next step would be to commission valuation advice. We would then return to Ministers for a decision on whether or not to proceed.

Risks around the sale process

5. Our shareholding in CIAL is governed by a double right of first refusal (RFR): (1) rights contained in the CIAL constitution, and (2) a RFR given to Ngāi Tahu as part of its Treaty settlement.

6. If the Crown wishes to sell, it must follow the process set out in the CIAL constitution. s9(2)(i), s9(2)(j) and 9(2)(h)

7.

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15. The Government may prefer not to execute a transaction of this nature during the pre- election period, which will commence on 23 June 2017. s9(2)(i), s9(2)(j) and 9(2)(h) s9(2)(i), s9(2)(j) and 9(2)(h) s9(2)(i), s9(2)(j) and 9(2)(h)

Next Steps

16. If you wish Treasury to continue to explore the viability of a transaction, our proposed next step would be to commission valuation advice. We would then return to Ministers for a formal decision on whether or not to proceed. s9(2)(i), s9(2)(j) and 9(2)(h) s9(2)(i), s9(2)(j) and 9(2)(h) s9(2)(i), s9(2)(j) and 9(2)(h)

Recommended Action

We recommend that you discuss this note with officials: a [Minister of Finance] at the meeting scheduled for 3.00pm on Tuesday 21 February b [Minister for State Owned Enterprises] at the meeting scheduled for 3.30pm on Monday 20 February.

Angela Graham Manager, Commercial Advice

Steven Joyce Hon Todd McClay Minister of Finance Minister for State Owned Enterprises

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Reference: T2017/369 CM-1-3-4-1

Date: 27 February 2017

To: Minister of Finance (Hon Steven Joyce)

Deadline: None (if any)

Aide Memoire: Christchurch Airport - Notes for discussion with your colleagues

The Crown owns a 25% shareholding in Christchurch airport (CIAL), with the other 75% held by Christchurch City Holdings Limited (CCHL), the investment arm of the Christchurch City Council (the Council).

9(2)(b)(ii),9(2)(i),9(2)(j) and 9(2(ba)(i) an interest in purchasing the Crown’s CIAL shareholding. From a policy point of view, we support the transaction. There are no strategic benefits for the Crown from owning a minority interest in the airport, and the capital could be usefully recycled into other Crown priorities.

There are however some risks that need to be considered before deciding whether or not to proceed.

Final ownership Our shareholding in CIAL is governed by a double right of first refusal (RFR): (1) an RFR to CCHL contained in the CIAL constitution, and (2) a RFR given to Ngāi Tahu as part of its Treaty settlement. Taking both together, this is the process that must be followed if the Crown wishes to sell its shares:

s9(2)(i), s9(2)(j) and 9(2)(h)

s9(2)(i), s9(2)(j) and 9(2)(h) s s9(2)(i), s9(2)(j) and 9(2)(h)

Treasury:3671175v1 COMMERCIAL-SENSITIVE 1

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* 9(2)(b)(ii),9(2)(i),9(2)(j) and 9(2(ba)(i) * 9(2)(b)(ii),9(2)(i),9(2)(j) and 9(2(ba)(i)

Question: Would Ministers be comfortable executing a transaction during the pre-election period?

Proceeds

9(2)(b)(ii),9(2)(i),9(2)(j) and 9(2)(ba)(i)

If Ministers are comfortable with the proposed transaction and specific issues highlighted above, Treasury’s next step would be to commission valuation advice. We would then return to Ministers seeking a formal decision on whether or not to proceed.

Jen Johnson, Graduate Analyst, Commercial Advice, s9(2)(k) Angela Graham, Manager, Commercial Advice, s9(2)(k) s9(2)(a)

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COMMERCIAL-SENSITIVE Extract from T2017/1669, dated 29 June 2017

Deleted - Not Relevant to Request

There is also a small opportunity for capital recycling ($14-47 m) that we recommend Ministers agree to pursue. 9(2)(i),9(2)(j) and 9(2)(h) an opportunity to take the Crown’s shareholdings in the four mixed ownership companies to exactly 51.0%, by selling the “excess” shareholdings above this level 9(2)(i),9(2)(j) and 9(2)(h) 9(2)(i),9(2)(j) and 9(2)(h)

Deleted - Not Relevant to Request

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f agree to pursue the capital recycling opportunity (selling the small excess shareholdings in the mixed ownership companies above 51.0% 9(2)(i),9(2)(j) and 9(2)(h) 9(2)(i),9(2)(j) and 9(2)(h)

Agree/disagree Deleted - Not Relevant to Request

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Deleted - Not Relevant to Request

A capital recycling opportunity

53. The Crown currently owns slightly more than 51% of the mixed ownership companies:

Company Crown $m value of shares shareholding above 51.0%4 Genesis Energy 51.232% 5.6 Mercury NZ5 51.152% 7.1 Meridian Energy 51.018% 1.4 Subtotal: electricity companies 14.1 Air New Zealand 51.909% 33.2 Total – all four companies 47.3

54. The “excess” shares above 51% for the electricity companies are the result of residual shares left over from the share offers programme, e.g. loyalty bonus shares that were held back by the Crown, but which retail shareholders were not entitled to when the eligibility period for the bonus shares ended.

55. For Air New Zealand, the excess holding is the result of a deliberate decision by Ministers to sell the Crown’s shareholding down to 53% rather than 51%. This was because Air New Zealand at that time had share options outstanding for executives which, when fulfilled by the company, would dilute the Crown’s shareholding. The selldown to 53% was based on advice from the Air New Zealand chair about the number of share options outstanding. Not all of those options were exercised, and so dilution to date has taken the Crown to 51.9%.

56. There is no legal reason for the Crown to hold more than 51% of the shares in the companies, and no legal restrictions on the Crown selling these excess shares (subject to due diligence, discussed below). We do not believe there are any policy reasons for holding more than 51%. There is also no statutory requirement to hold 51% (or any percentage) of Air New Zealand shares (in contrast to the electricity companies).

4 Based on share prices as at 20 June 2017 5 This excludes shares held by Mercury as treasury stock s9(2)(i) s9(2)(j)and s9(2)(h) Page 13

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57. We believe the excess shareholdings represent an opportunity to recycle capital to the Crown for higher priority uses elsewhere. 9(2)(i),9(2)(j) and 9(2)(h) 9(2)(i),9(2)(j) and 9(2)(h)

58. 9(2)(i),9(2)(j) and 9(2)(h) 9(2)(i),9(2)(j) and 9(2)(h) we think the opportunity to take the Crown’s shareholding to exactly 51.0% should be taken.

59. This would generate around $14 million of proceeds for the three electricity companies, and potentially another $33 million for Air New Zealand (depending on its share price, which as you know is quite volatile, and is currently at a record high).

60. 9(2)(i),9(2)(j) and 9(2)(h)

61.

Deleted - Not Relevant to Request

s9(2)(i) s9(2)(j)and s9(2)(h)

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