Provincial fund nearly spent $30m on airlines

The Provincial Growth Fund was on the cusp of investing $30 million to purchase stakes in two private airlines - including one that had not even applied for funding - before advice from sceptical Treasury and Ministry of Transport officials encouraged ministers to put a stop to the plan.

The documents also show that one airline was not even aware that the fund was looking to invest in it. The Provincial Development Unit which administers the fund had singled out an airline on the basis of a proposal from one of its competitors.

Documents released to Newsroom under the Official Information Act show a private airline applied to the PGF for $20 million in exchange for a Crown shareholding. The precise number of shares was redacted in the documents. 

The purchase would enable the airline to purchase two additional aircraft and an aviation engineering business, and allow it to repay some debts. It would also allow the airline to fly new services.

Applications of between $1 million and $20 million dollars are required to go to a Regional Economic Development Ministers’ meeting for sign off. Those ministers are Shane Jones, Grant Robertson, David Parker, and Phil Twyford. The ministers are briefed by the MBIE’s Provincial Development Unit (PDU), and an independent advisory panel on proposals. 

The PDU advised that the $20 million request be downgraded to an investment of $15 million, but also recommended that another investment of $15 million be made in another airline. This is noteworthy as the second company had not yet applied for funding from the Provincial Growth Fund. 

While the fund only takes applications from people or organisations, the PDU can work applicants through the process. 

The proposal went to a meeting of the Regional Economic Development Ministers’ meeting on 13 August, 2018. There, the Provincial Development Unit recommended the ministers invest up to $18 million in convertible notes (which convert to a percentage of ordinary shares) in one airline. 

Ministers appeared interested enough in the proposal to ask for more information, although they were worried about the precedent the proposal would set. 

A briefing from Treasury and Ministry of Transport to Ministers Robertson, Twyford, and Jones ahead of a subsequent meeting on 6 December records some enthusiasm. 

“RED Ministers indicated that they wanted to consider the proposal in the context of analysis into regional air connectivity, and noted some high-level concerns about precedent effects”.

The proposal was shot down at the Regional Economic Development Ministers meeting on 6 December 2018. Jones said that while he was keen for the proposal to go further, his colleagues were less enthusiastic. 

“Whist I personally was very keen to avoid a situation where aviation connectivity was going to be weakened, at the end of the day these are decisions that are made in the context of consensus. There was no consensus therefore it died,” Jones said. 

“Basically, I’m a venturesome spirit, I was keen for the process to go a tad further, but I live by the process of all four ministers,” he said. 

Jones confirmed the second airline was not told that the PDU had earmarked it for potential investment for reasons of commercial sensitivity. 

The advice notes significant concerns from Treasury and the Ministry of Transport. In particular it records scepticism about soliciting a funding application from a company that had not yet sought PGF funding. 

“[The company] has not applied to the PGF for funding, and we have not seen any analysis of what benefit a $15 million investment in this company would provide,” the briefing said. 

The briefing also notes the Ministry of Transport’s satisfaction with current regional connectivity. 

“Recent work by the Minister of Transport into air services and developments in that market has not identified any strong candidates for routes with significant current or potential unmet demand.”

It said that most communities were within 80 kilometres of an airport, and most had at least one service to a major airline. 

Government could acquire stakes in regional airlines

While this particular proposal failed to lift off, Jones would not rule out PGF funds being used to acquire stakes in other regional airlines. PGF funds could also be used to subsidise certain routes.

Jones said the Ministry of Transport had been dispatched to complete policy work on regional connectivity. This work will shortly be presented to the Regional Economic Development Ministers. 

Jones didn’t rule out this including proposals to acquire holdings in regional airlines, although given the Ministry of Transport's clear skepticism about acquiring regional airlines, further purchases seem unlikely.

Treasury and Transport vs the Provincial Development Unit

The documents also reveal some tension between the PDU’s system of funding and the more free-market approach of Treasury and the Ministry of Transport. It says that if the investment is viable, the companies should be able to get funding from private lenders, rather than the state. 

“[W]e expect that if second or third tier airlines can identify market opportunities that further investment would enable them to exploit, they should be able to demonstrate this potential to lenders,” it said. 

The briefing said that any funding should be tied to specific services, rather than airlines in general.

“Any such ground for subsidy will apply to particular routes, and any subsidy should be targeted to ensure that particular service is provided,” it said.

“The Treasury and the Ministry of Transport do not agree with the Provincial Development Unit’s position that subsidising a second tier of airlines will necessarily build confidence and investment in the regions such that their economies will grow, or that this is most efficient approach to encouraging economic growth,” it said.

The paper also raised concerns that using PGF funding to pay down debt would have “no direct benefit to the regions”. 

The ministries also raised their concerns at some of the information provided about the airline the PDU wanted to invest in. The said the valuation of the company “does not appear to be robust” and its forecasts were “not credible”. 

“It shows a forecast level of profitably substantively above historic levels, with no basis provided for the increase,” the paper said. 

It also noted that the PDU had not shown any analysis of the other airline it wanted to invest in. 

The Government already owns a stake in the country’s largest airline, Air New Zealand. This was acquired under the Clark government. After a failed takeover of the now-defunct Ansett airline, the Government acquired an 82 percent stake in Air New Zealand for $885 million. That shareholding was reduced to 52 percent under the Key government. 

National's regional development spokesperson Paul Goldsmith said the Government's shareholding in Air New Zealand should give it pause. 

“It is odd for a Government to consider getting into a business that would directly compete with one it already owns - Air New Zealand," Goldsmith said.

"I'm glad Treasury’s advice was listened to," he said.

Jones has been critical of Air New Zealand’s commitment to regional connectivity in the past. Last year, he suggested chairman Tony Carter step down after the airline cut services to the Kāpiti Coast. Jones also said the company's CEO, Christopher Luxon should stay out of politics.

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