Wall Street 'an embarrassment to good capitalism' says Infratil's Lloyd Morrison

By Gareth Vaughan

Comparing the privatisations of the 1980s with the National-led government's proposal to float minority stakes in four state owned enterprises (SOEs) is like saying Wall Street is the only way capitalism can work, when it's "an embarrassment to good capitalism," says Lloyd Morrison.

Morrison, founder and a director of sharemarket listed infrastructure investor Infratil and executive chairman of Infratil's manager Morrison & Co, told interest.co.nz in an interview that he had long believed partial floats of SOEs were a very good idea. Morrison said such floats would be good both for the SOEs and investors.

But he said comparisons with the privatisations of the 1980s were only "tribal politics looking for votes."

"The privatisations that happened in the 1980s were generally well intentioned but in some instances the lack of knowledge and the simplistic adherence to text book philosophy saw a number of short-termists take advantage of under valued assets which gave privatisation a bad name as far as New Zealanders are concerned," said Morrison.

"And I think that New Zealanders lose from that."

"It's a bit like saying that Wall Street is the only way that capitalism can work," Morrison added. "Wall Street is not a good reflection. It's an embarrassment to good capitalism."

"Good capitalism through competition, provides efficiency of asset allocation, of capital allocation, security of jobs and good employment," Morrison added.

"And for consumers the best results in service. The sort of stuff that we see in Wall Street doesn't add any value to the American economy or the world economy, but it doesn't mean to say that we should throw the baby out with the bath water."

A research report from analysts at Goldman Sachs last week noted privatisations between 1998 and 1999 raised more than NZ$19 billion. They said, however, New Zealand was unique among OECD countries in its preference for trade sales with about 60% of assets sold via trade sales compared with the OECD average of just 20%. Just 2% of NZ sales were via public floats, versus 62% across the OECD. And about 60% by value of NZ's public assets sold between 1988 and 1999 went to international rather than domestic buyers.

Morrison, a former director of sharemarket operator NZX, pointed out the SOEs the government was considering selling stakes in - Meridian Energy, Mighty River Power, Genesis Energy and Solid Energy - would remain 51% government owned. He said government sell-downs would provide many people with an opportunity to participate in their ownership, and the management, consumers and directors will all benefit from greater accountability.

"There will be some offshore investors of the type that we like, - those providing passive capital who will consider investing in New Zealand when they haven't, and the government will have a little bit of capital from the sell-down of those assets that it badly needs at the moment for purposes such as Christchurch and better directing our economy."

Health 'stable'

After under going treatment for leukemia in Seattle during 2009, Morrison is very much back involved at Infratil, the company he founded in 1994 which now has a market capitalisation of NZ$1.2 billion.

Infratil's assets include, all or part, of TrustPower, Wellington Airport, NZ Bus, Shell petrol station operator Greenstone Energy in partnership with the New Zealand Superannuation Fund, and Glasgow Prestwick Airport.

Morrison brought former Telecom chief financial officer Marko Bogoievski on board as Infratil's chief operating officer in 2008 and once he became ill, Bogoievski replaced Morrison as CEO.

"Marko's running the ship and everybody's reporting to Marko," Morrison said. "I see myself as the keeper of the culture. I'm also interested in giving back. I think that good organisations form a real part of the community they operate in and that has always been the case with Infratil and Morrison & Co and I wouldn't want that to change. I tend to get involved at that sort of level."

Of Bogoievski Morrison says he appointed him because the scale of Infratil and Morrison & Co was getting to a level where "it needed a better manager than me."

"I've never had a fear of employing people who are smarter or better than me and Marko's certainly an example of that," Morrison said.

As for his health, Morrison said the good news is that he's stable.

"The bad news is that I still get quite a lot of treatment. I get chemotherapy on a six week cycle at the moment - a week's worth of chemo and then six weeks off."

More savings needed as 'borrowing internationally and building homes doesn't work'

Following the tragic Christchurch earthquake of February 22 and in the wake of the Global Financial Crisis (GFC), Morrison said New Zealand was in a vulnerable position should it be hit by another shock, - either another natural disaster or an international financial crisis.

"In terms of dealing with immense tragedies like Christchurch, we have to build retained earnings, or savings, that enable us to do so. So that means a simplistic savings regime that we've had historically, which is borrowing internationally and building homes, doesn't work," said Morrison.

"Because that relies on rising prices which are not sustainable unless living standards are there to support rising prices locally, or international borrowings are there forever, neither of which is the case for New Zealand."

The savings regime where many people had thought it was good enough to solely save through investment in their homes had received "a wake up call" from the tragedy in Christchurch.

"So if we're going to earn, we need to learn how to make businesses internationally successful and competitive and we need as a country to encourage businesses to do that," said Morrison.

"So getting our capital markets supported on a long-term basis, respecting the role that they play, encouraging business success, encouraging international business performances of scale, is something that we need to come to grips with."

New Zealand also needs to "be good in our regulations so regulation is not just a stick, but is a carrot and a stick." We also need to respect regulation, not just having a "free market policy which really is benefiting some and not all."

"It's getting the balances right. It's achievable. New Zealanders aren't good at change but it's possible out of this sort of situation it will happen," said Morrison.

"Perhaps the silver lining that comes out of the Christchurch tragedy is a bit of a wake up call for New Zealand about earning our way because to put Christchurch back on its feet is going to empty the cupboards," he added.

"The government has quite rightly said it's an absolute priority for the country and nobody would question that. The results will be cut backs in other parts of the country that perhaps we wouldn't have previously considered and I think that it's possible that some of those cut backs will actually be good for us in the longer term."

Fundamentals of global financial system unchanged despite credit crunch

Meanwhile, Morrison said the underlying problems in the global financial markets that allowed the global crisis of 2008-2009 to occur have not been addressed. He bemoaned the repealing of the 1933 Glass-Steagall Act in the United States in 1999, which effectively removed the separation that previously existed between Wall Street investment banks and depository banks, and the US allowing derivatives, which have become "proprietary speculative instruments" traded internationally, to remain unregulated.

"The underlying problems of financial markets have not been addressed and it doesn't look as if they're going to be," said Morrison.

"So if one looks at that and says 'where's New Zealand, what's our position at the moment?' It's somewhat fragile. We're dealing with a major issue, we have to deal with it, we support dealing with it, (but) we would find difficulty sustaining another shock and we certainly wouldn't be prepared if the world had another shock. So we need to reflect on that and we need to think about how we're going to address it otherwise we really carry significant risk."

New Zealand had to work out how to become sustainable, with sustainability being about longevity, meaning the country can come through ups and downs.

"In terms of our balance sheet, we need to have a balance sheet that can handle ups and downs, be they from world financial markets or from issues particular to dealing with New Zealand like the earthquake."

"To have a balance sheet that can take ups and downs you have to have a long-term view not 'she'll be right' or 'we're okay as long as nothing goes wrong.' You need to actually have some padding in it and that means that you don't risk too much in any particular way."

'Not good enough to rely on Australia's goodwill'

And given that New Zealand relies on international banking - through four Australian-owned banks holding 92% of the country's banking assets in ANZ, ASB, BNZ and Westpac- we need to make sure our own financial system is as strong and independent as it can be.

"Australia was lucky in the GFC and that's good because as a result of that New Zealand was lucky," said Morrison.

"The Australian banks were resilient as a result of their own economic conditions. We were lucky because those Australian banks were supportive of New Zealand and I think we rely very much on them. In recent years I think (Reserve Bank Governor) Alan Bollard has done a very good job to make sure there's more local accountability for those banks," said Morrison.

"It's not good enough for us to rely on the goodwill of Australia. Those banks do very well here. They earn a very good return on capital and they deserve it to the extent they've been here for a long time and have been very committed to New Zealand, but we can't afford that to change," he added.

"So making sure they're institutionalised as New Zealand operations with capital and priority for New Zealand, is quite critical, and with management and boards who reflect that local position."

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