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'Newbank' Papers Released

"Official papers released today on the 'Newbank' initiative show the Government received strongly competing advice requiring it to exercise an especially high level of care in deciding to allow New Zealand Post Limited to proceed," Finance Minister Michael Cullen said.

"The final letter of approval to New Zealand Post Chairman Ross Armstrong states that the agreement is subject to a list of conditions all designed to protect the Crown's investment and to limit its exposure.

"These include a specific statement that there will be no ongoing financial support nor any Government guarantee - either explicit or implicit - of the new bank," Dr Cullen said.

Other conditions the Government stipulated were:
* that any further money New Zealand Post put into the venture beyond its original $83 million stake would require the consent of the shareholding Ministers
* that a system be developed for the transparent allocation of costs for shared services between the bank and the rest of New Zealand Post
* that a vigorous monitoring regime be put in place
* that the Government be consulted on the appointment of the two independent directors to the new bank's board.

"We also sought an assurance from New Zealand Post that it would not engage in the riskier corporate banking market, instead restricting itself to retail banking," Dr Cullen said.

"It is true that Treasury and CCMAU recommended against the proposal and that, although all five scenarios modelled in the Cameron & Company report were profitable, one scenario had the new bank failing to achieve profits equivalent to the 11.7 percent assumed cost of capital.

"But New Zealand Post has responded in detail, and to the Government's satisfaction, to the risks identified by Cameron & Company and has further developed its strategies to mitigate those risks.


"It has also, at the Government's instigation, developed an exit strategy to protect the Crown in the unlikely event that the new bank fails to achieve reasonable levels of profitability.

"The amount to be recouped has been withheld for reasons of commercial confidentiality but, as the 2 February memorandum for the Cabinet Business Committee [page 7] confirms, it represents "a significant proportion of the initial investment," Dr Cullen said.

"No Government goes lightly against official advice. But New Zealand Post is confident its business case is robust and that the bank will be in profit by Year Three and paying dividends by Year Four.

"The Government places considerable confidence in New Zealand Post's assessment because it is one of our most successful SOEs.

"At one stage, I had mentioned the possibility of having the Cameron report subjected to external review but later decided against this. Officials advised that it was very thorough and that any judgement about the core sensitivity - the extent to which people would switch banks - was essentially subjective and could not be proved theoretically.

"New Zealand Post thinks Cameron & Company's assumptions on the level of switching are too conservative. Cameron & Company thinks New Zealand Post is being too optimistic.

"However New Zealand Post has a number of features which opinion testing shows are attractive to many New Zealanders. It is New Zealand-owned, has a strong brand, and believes it can offer a "no frills" service at a cheaper cost than the other mainstream banks," Dr Cullen said.

"It also needs to diversify its activities as its core postal business is under pressure from new technologies.

"The previous government was committed to privatisation. This Government wants to retain well-performing companies in public ownership and has strong community support for this stance.

"But it means we have to ensure that they can continue to perform well, maximising dividends and shareholder value. Occasionally that will require the Crown to finance SOE expansion plans.

"That is part of the duty of the responsible and prudent stewardship of state assets," Dr Cullen said.

Ends

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