Part 5: Our relationship with mixed ownership model companies and their public accountability

5.1
This Part outlines the:

• Auditor-General's role in the public share offers for Mighty River Power Limited, Genesis Energy Limited, and Meridian Energy Limited; and
• public accountability requirements for these mixed ownership model companies.³⁰

5.2
The mixed ownership model companies remain public entities, and their accountability requirements are similar to the requirements they had as SOEs.

Our role in the public share offers of mixed ownership model companies

Background

5.3
In 2012, the Government introduced the State-Owned Enterprises Amendment Act 2012 to support its intention to offer the public shares in four SOEs (as defined in the State-Owned Enterprises Act 1986) and to sell part of its ownership in Air New Zealand Limited.³¹

5.4
For each of the mixed ownership model companies, the legislation came into force on a different date. The date was appointed by the Governor-General by Order in Council and was before the respective public share offers.

5.5
The purpose of the legislation was to remove the mixed ownership model companies from most provisions in the State-Owned Enterprises Act 1986.³² Effectively, the legislation permitted:

• removal of the public entity from the schedule of State enterprises, as listed in the State-Owned Enterprises Act 1986; and
• incorporation of the public entity into a new Schedule 5 of the Public Finance Act 1989.

5.6
The Public Finance Act 1989 now includes provisions that ensure that the Crown owns at least 51% of the shares of the mixed ownership model companies and that no one person owns more than 10% of the shares.³³

5.7
The mixed ownership model companies are now subject to the accountability provisions in the Companies Act 1993 and the Financial Markets Conduct Act 2013, rather than the provisions in the State-Owned Enterprises Act 1986.

Audited information in the prospectus

5.8
To sell shares in the mixed ownership model companies, the Crown carried out an initial public offering for each company. The Crown made a public offering for the sale of shares to the general public, on a securities exchange, for the first time.

5.9
Details of the public offering were disclosed to potential buyers of shares in the form of a prospectus or offer document. The Securities Regulations 2009 (the Regulations) specify the information that a full prospectus must contain. This includes the requirement to include historical financial information.

5.10
Because SOEs are public entities under the Public Audit Act 2001, the historical financial information included in the prospectus had previously been audited. The appointed auditor had expressed an opinion on that information on behalf of the Auditor-General. This audit opinion was included in the prospectus alongside the historical financial information.

5.11
Regulation 5(1)(a) and clause 28 of Schedule 1 of the Regulations also require the prospectus to include an auditor's report. The auditor's report is required to state, among other matters:

• whether the financial statements contained or referred to in the prospectus comply with generally accepted accounting practice, and give a true and fair view of the matters to which they relate (if the financial statements did not comply or give a true and fair view, the auditor's report would outline why); and
• a statement that, in the auditor's view, the prospective financial information has been compiled and calculated based on the accounting policies set out in the prospectus.

Auditor independence

5.12
Independence is fundamental for an audit. The independence of the Auditor-General is supported by law. Requirements are placed on appointed auditors and their firms to ensure that they meet the independence standards that the Auditor-General expects.

5.13
For the public share offer of mixed ownership model companies, the Auditor-General wrote to the chairpersons of the mixed ownership model companies to reinforce the importance of independence.

5.14
We recognised that, in the share offer process, there was a particular need for appointed auditors and their firms to maintain an appropriate distance from decisions that are the responsibility of the mixed ownership model companies. As a result, we reinforced the respective roles and responsibilities of all parties, especially with the due diligence process.

5.15
To protect the independence of the Auditor-General, the Office of the Auditor-General and Audit New Zealand also have internal policies that prohibit certain employees from having financial interests in public entities, including owning shares in mixed ownership model companies.

Accountability for mixed ownership model companies

Primary accountability of shareholding Ministers to Parliament

5.16
As shareholding Ministers on behalf of the Crown, the Minister of Finance and the Minister for State Owned Enterprises are accountable to Parliament for the mixed ownership model companies.

5.17
The Treasury provides the Ministers with advice about ownership and investments.

5.18
Parliament has resolved that Mighty River Power Limited and Meridian Energy Limited are "public organisations" for the purposes of Standing Orders. We understand that Parliament intends to make the same resolution for Genesis Energy Limited. This means that each mixed ownership model company can be called for an annual financial review of its performance and current operations after its annual report is presented to Parliament. Air New Zealand Limited is also a public organisation. It can also be, and has been, called for an annual financial review.

The role of the Auditor-General as auditor in enhancing accountability

5.19
The Auditor-General continues to be the auditor of the mixed ownership model companies. They are public entities listed in the Public Audit Act 2001, because they continue to be controlled by the Crown.

5.20
For the same reason, the Public Finance Act 1989 specifies that they should be included in the Financial Statements of the Government. However, because some of their net assets are owned by others, the Financial Statements of the Government incorporate 100% of the assets, liabilities, revenue, and expenses of the mixed ownership model companies and also reflect that the residual is attributable to minority interests. The Financial Statements of the Government include a line called "minority interests", which reduces the total operating balance and net worth by the amount attributable to minority interests. The Financial Statements of the Government for the Year Ended 30 June 2013 describe in more detail how the partial sale of shares in Mighty River Power was accounted for.³⁴

5.21
New Zealand-based subsidiaries of the mixed ownership model companies are also public entities. However, overseas subsidiaries of public entities are not public entities and are not audited by, or on behalf of, the Auditor-General.

5.22
The Auditor-General, through her sector managers, has a long-standing practice of writing each year to the shareholding Ministers of each SOE to summarise the results of the annual audit. This letter also notes any particular matters about the operation or performance of the company that Ministers should be aware of. There are specific procedures to ensure that this communication treats any confidential information appropriately – for example, by providing the letter to the SOE before it is finalised to ensure that it is factually accurate. The practice of writing to shareholding Ministers will continue for mixed ownership model companies.

5.23
Because mixed ownership model companies are publicly listed and subject to securities market regulation, there is particular sensitivity about access to inside information (information that, if publicly known, could materially affect market prices of a company's securities). To ensure that Ministers and officials do not unnecessarily or inadvertently receive inside information through these letters, the practice of the company first being given an opportunity to consider the letter for factual accuracy will continue. We will also ask mixed ownership model companies to confirm that the letter does not contain any material price-sensitive information.

30: Section 45P(1) of the Public Finance Act 1989 defines "mixed ownership model company".

31: At first, Solid Energy was to take part in this public share offer, but this did not transpire. The Government sold additional shares in Air New Zealand Limited through a different process. As a result, we do not discuss these two companies in this Part.

32: Sections 22 to 30 of the State-Owned Enterprises Act 1986 still apply to the mixed ownership model companies.

33 There are some exemptions from the 10% limit for trustee corporations and nominee companies.

34: Financial Statements of the Government of New Zealand for the Year Ended 30 June 2013, page 9.