CHAPTER SIXTEEN

Commanding Trust

At the dawn of election year 2011, John Key made an announcement that silenced those in business circles who thought he lacked the backbone to put his popularity on the line for the sake of the economy. He announced a programme of asset sales. By doing so when he did, he displayed far more courage than reformers of yesteryear who had never put their more daring reforms to a popular vote until after the fact. Key announced his programme before an election and asked for a mandate. It was breathtaking.

‘Privatisation’ has been an unspeakable word in politics for as long as anyone can remember. People feel they have a personal stake in public property and do not like losing any part of it. Even the drastic reform programme of the fourth Labour government did not include privatisation until after it had been re-elected. Its cabinet first issued a list of likely sales in mid-1988, and did so to reassure finance markets it was holding course after David Lange’s break with Roger Douglas. Had Lange stayed the course, it is doubtful that Douglas could have convinced the cabinet to go further than its corporatisation of public services as ‘state-owned enterprises’. Asset sales begun by Labour were eagerly continued by the National government of the 1990s, adding to the public discontent in that decade, but they were firmly renounced by Helen Clark during her nine years in power. Her government bought back Air New Zealand to save it from a disastrous investment decision in Australia, and renationalised the railways after two private owners had failed to make the network economic. Privatisation was ruled out by John Key for his first term. In January 2011 it was proposed by Bill English as a solution to a debt problem.

In 2010, debt was rising rapidly and we’d had the first earthquake. I was thinking, ‘If we don’t do something this could really get away on us.’ We had to knock $10 billion out of the budget. The first time I raised [asset sales] in cabinet, they laughed. People don’t underestimate John Key now but they did then.

When Key announced the programme he made it as palatable as he could. No more than 49 per cent of the chosen assets would be floated on the share market. The state would retain the majority holding. It was only a partial privatisation, or, as he preferred, a ‘mixed ownership model’, and the initial public offering would be restricted to New Zealanders. Small investors would be first in the queue.

Public opinion was not appeased. The assets he proposed to float included three big electricity generating companies whose hydro dams, thermal and geothermal plants were among the most visible and valued symbols of national wealth. The hydro projects, in particular, had been highly publicised and celebrated at each stage of their construction in the post-war decades of public investment. In the 1990s they were divided among four companies carved out of the state-owned Electricity Corporation by the previous National government when it put the industry on a competitive footing. One of the companies, Contact Energy, had been sold before the Shipley government lost office. It was logical to put the rest on the market, though Key did not put it that way.

Typically, he tried to make his case to the public in accounting rather than economic terms. The government needed to release some capital for other needs. It had been borrowing heavily to help the country through the recession and global financial crisis and now it faced the cost of earthquake repairs. It was going to hold departmental spending very tight for the next few years but it would need to extract some cash from its balance sheet too. It believed it could release $5–7 billion from the sale of shares in Meridian Energy, Genesis Energy, Mighty River Power, its coal-mining company Solid Energy and Air New Zealand.

It mentioned other benefits: the stocks would give the share market a much-needed boost, more New Zealanders might become business investors, and the state-owned companies would perform better under the active scrutiny of brokers, fund managers and other serious investors. The last-mentioned is the essence of the economic case for privatisation, yet Key and English never made it strongly. They would offer it almost as an afterthought, referring vaguely to ‘share market discipline’. They preferred to deal in bookkeeping arguments and most people never bought them.

A TV3 Reid Research Poll soon after the asset sales announcement found 80 per cent opposed to them. A Herald-DigiPoll survey in May found more than 62 per cent opposed. In July, DigiPoll measured opposition at 57 per cent, including 40 per cent of those who intended to vote National. A week before that poll Labour had shown matching courage in deciding to go to the election with a capital gains tax – the first time in memory that a major party has done so. National hardly uttered a word of criticism, which suggests a capital gains tax had some powerful support in its caucus too. One old bogey of New Zealand politics may have been laid to rest. When voters were asked which policy they would prefer as a means of reducing government debt, 43 per cent of the DigiPoll sample chose a capital gains tax, against 34 per cent for asset sales.

Events over the next two years would undermine the financial rationale for the sales. A fall in the world price of aluminium cast a cloud over the future of Southland’s Tiwai Point smelter which uses 14 per cent of all the power generated in New Zealand. The smelter company, a subsidiary of the global mineral giant Rio Tinto, was trying to renegotiate its future power price with the supplier, Meridian. If they could not agree on a price that would keep the smelter running, the market would be massively oversupplied.

The implications for the value of the companies about to be floated were so dire that the government provided the smelter with a $30 million subsidy to keep it going. Then, on the eve of the first float, the Labour and Green parties jointly announced they would take control of the wholesale electricity market if elected. Despite it all, shares were issued in Mighty River Power at a good price for the government, less so for the buyers. The price soon plummeted and the next public offerings, of Meridian and Genesis, had to be sweetened at additional public cost. The share market had a glut of electricity stock and the financial gain to the government was less than it might have been if the programme had been more gradual.

In the end the case for proceeding with the asset sales was economic rather than financial. It was a rare political opportunity to make virtually all of the economy’s electricity supply responsive to active shareholders and commercially accountable for its costs, investments and competitive results.

But all of that was in the future. Despite the unpopularity of asset sales in every poll before the 2011 election, the subject was having no discernible impact on voters’ intentions. Support for both National and Key personally continued to soar above 50 per cent. Key was the preferred Prime Minister of 67 per cent in DigiPoll’s May sample and 70.6 per cent in July. Most people trusted John Key even if they did not like what he proposed to do.

If there was going to be any doubt that the election would give him a mandate, the Labour Party dispelled it. Back in January, on the day the privatisation programme was announced, Labour leader Phil Goff had declared the election would be ‘a referendum on asset sales’. For the rest of the year Labour clung to the belief that Key had made a monumental mistake. With Goff barely polling in double figures, Labour had little else going for it. As November approached, Labour took its leader off its campaign billboards, replacing him with a single message: no asset sales.

The election was an over whelming endorsement. National increased its share of the vote – a rare achievement for a party in power in New Zealand. National’s vote had last risen in office at the snap election following the 1951 waterfront dispute, 10 years before John Key was born. Bill English, a year younger than Key, was not surprised the asset sales programme did them no damage. ‘I knew it would be unpopular but I didn’t think it was a vote-shifter. More important, John didn’t think it was a vote-shifter.’ As English explains, governments do their own intensive polling and sometimes discover opposition to a supposedly unpopular policy does not run deep.

If you poll our voters they will say, ‘We don’t think it is a good idea’, but that is not because they don’t think it’s a good idea, it’s because it’s unpopular. It is not as if we ever went to a National Party meeting or a chamber of commerce and they said, ‘Don’t do that.’ They’d say, ‘Why are you doing that?’ A lot of punters, our base, didn’t get Working for Families cut, didn’t get super changed, didn’t lose interest-free student loans, didn’t get small-government rhetoric and the hairy-chested reform stuff, but they had to get something. They had to get some red meat from moderate John.

Key had his mandate when he greeted cheering election-night supporters for a second time at Auckland’s SkyCity Convention Centre on 26 November 2011, but that venue would put public trust in him to another test in his second term.

Nearly six months before the 2011 election, Key had announced that SkyCity was the preferred bidder to build, own and operate a 3500-seat convention centre of international standard in Auckland. The casino’s bid was preferred over several others for 350 million reasons, all of them dollars. Unlike the others, SkyCity would require no public funds. It was proposing to carry the $350 million cost entirely – in return for a licence extension and the right to install more gaming tables and poker machines. The numbers would be matters of negotiation before the deal was finalised.

Not much more was heard on the subject before the election, but the following year it erupted in a blitz of headlines about problem gambling, especially on ‘pokies’. The deal threatened to reverse a sinking lid on pokie machines in Auckland since 2003 when the Labour government empowered councils to stop a proliferation of pokies in pubs.

The Problem Gambling Foundation predicted an upsurge in addiction and questioned whether the casino was a safer gambling environment than clubs and pubs. Incidents involving abandoned children at the casino had nearly tripled in two years. Key believed casinos were generally safer and less likely to encourage casual gambling by those who could least afford it. ‘Pokie machines typically prey on low socio-economic groups. There’s a high proliferation of them in West Auckland and South Auckland. At least with a casino it’s a much more determined action to go there.’

Most people were not persuaded. A DigiPoll survey in May 2012 showed 40.3 per cent disapproved of the pokie deal under any circumstances, 37.7 per cent did not mind so long as the number of poker machines across the city dropped, while less than 20 per cent approved regardless.

In June, questions were raised about Key’s personal encouragement of a SkyCity bid and the Office of the Auditor-General began an inquiry. It was a potent issue for a Prime Minister who opposition parties believed vulnerable to impressions that he was too close to corporate leaders. They constantly accused him of ‘cronyism’ or ‘looking after his mates’. SkyCity’s unsuccessful rivals were not much concerned that Key had talked to the casino along the way. Ngati Whatua chief executive Tiwana Tibble said, ‘I lobbied the PM, I went and saw him a couple of times. It’s a $350 million contract, that’s what people do. They don’t just stick a tender in the envelope and hope for the best.’ Nevertheless, while the now year-long negotiations with SkyCity would continue, nothing would be announced until the Audit Office issued its report.

Deputy Auditor-General Phillippa Smith produced her findings in February 2013, and while she found nothing wrong with the Prime Minister’s discussions with the casino, and nor did she express disapproval of the principle that a social policy might be traded for an economic asset, she was concerned that rival tenders were not given the same opportunity.

The deal was finalised and announced in May by Economic Development Minister Steven Joyce, not Key. Auckland would get an international-class convention centre now estimated to cost $402 million and inject $90 million a year into the economy. SkyCity would be able to install 230 additional pokie machines which critics calculated would produce 184 extra problem gamblers at an annual social cost of $6.6 million. Most people were not impressed. A nationwide DigiPoll sample in June recorded opposition to the deal at 61.5 per cent.

But National’s support remained around 47 per cent, slightly above its vote at the election, and Key was still the preferred Prime Minister of 63 per cent. The trust Key commanded was all the more remarkable for the fact that he had faced many more troubles than these in his second term.

Key’s troubles had started during the election campaign. Like Clark at her second election when she was ambushed on television by ‘Corngate’, Key lost his composure over an incident the press soon christened ‘Teagate’. A freelance photographer had left a live recording device in its case on the table in the Newmarket café where Key and ACT’s new Epsom candidate, John Banks, were staging a cup of tea together as a sign to National voters in Epsom that they should give their party a partner. Key did not discover the recording device until after he and Banks had exchanged some candid views, including the observation that Winston Peters’ elderly supporters were dying out. The recording was given to the Herald on Sunday and it treated the conversation as private, seeking Key’s permission to publish a transcript. He not only refused permission, he called in the police, thereby creating a story that dominated the rest of the election campaign. Peters capitalised, getting his party over the 5 per cent threshold and returning to Parliament with eight seats.

Key’s greatest political attribute had deserted him. For the first time he had let a trivial incident matter, and it continued to gnaw at him. Months later, when talking about it, his cheerful demeanour would change.

The tea tape stuff wound me up – I probably shouldn’t have let it. It is one of the few times that something ever has. It was a violation of trust between me and the press gallery. I shouldn’t have let it hit me so deeply but anyway I did and that’s life. The public didn’t care about it.

It would become a valuable lesson for him about the unexpected incidents that can blow up in the face of a Prime Minister on an election campaign. ‘Expect the unexpected’ became a motto for him and National’s campaign manager, Steven Joyce, after ‘Teagate’. The lesson was to serve them well in the next election, but that is a subject for a later chapter.

By March of 2012, the first year of his second term was not going smoothly. A Chinese company’s bid to buy the Crafer family’s 16 farms was testing public acceptance of foreign, or maybe just Asian, investment. The High Court found fault with the Overseas Investment Office’s initial approval of the sale. On other fronts, the asset sales were made subject to Treaty claims at the insistence of the Maori Party and the power company floats would have to be reconciled with rights of iwi to have questions of freshwater ownership considered. A National Party member, Bronwyn Pullar, was telling the press about an ACC spreadsheet sent to her by mistake with other people’s file numbers on it. The press were calling it a ‘massive security breach’. ACC minister Nick Smith resigned when it became known he had written a letter in support of Pullar’s accident claim.

But Key’s problems were just beginning. Back in January the police had swooped with paramilitary force on a sprawling mansion at Coatesville. The occupant, a big, baby-faced German who had made a fortune on a file-sharing website, was wanted in the United States to answer copyright charges. Kim Dotcom was not willing to go. His Megaupload site was taken down and Dotcom spent a month in custody before he was bailed to fight extradition. He felt let down when he wanted help from former Auckland mayor John Banks, who had replaced Rodney Hide as ACT MP for Epsom, and let it be known he had donated $50,000 to Banks’s unsuccessful mayoral re-election campaign in 2010. He mentioned the sum had been divided in two, at Banks’s suggestion, so that it could remain anonymous.

Banks pleaded severe memory loss. An initial police investigation found he had personally solicited the money recorded as anonymous on an electoral return he had signed, but it found no evidence he had knowingly filed a false return. Key preferred not to read the police report. By then the Dotcom case had presented him with a greater problem.

Seriously rich, with a personal fortune estimated at that time to be about four times Key’s own wealth, Dotcom had hired a top legal team led by the highly respected Paul Davison QC. They were winning in court on procedural issues over the January raid and had discovered that New Zealand’s external intelligence agency, the Government Communications Security Bureau, had monitored Dotcom at the request of the police. The GCSB’s governing statute at that time did not allow it to spy on New Zealand citizens, which included an immigrant granted residency.

Intelligence agencies are always part of a Prime Minister’s portfolio and Key blamed the illegal operation on ‘brain fade’ at the GCSB. He issued an apology to Dotcom but it did no good. The story would only get worse for Key. Having denied any personal knowledge of the GCSB’s role in Dotcom’s arrest, he had to admit a month later that it had been mentioned to him when he visited the GCSB offices not long after the raid. In Parliament the opposition howled that it was the Prime Minister who was suffering brain fade.

To the public, Dotcom and the GCSB was a sideshow, but at the end of September, John Armstrong noted the rising spirits of opposition parties as two polls showed a slight narrowing of National’s lead. ‘What has changed – if only briefly – is the Prime Minister’s demeanour,’ he wrote. ‘His natural effervescence and self-confidence seemed to desert him in the House. His normally precise answers to questions sounded vague and uncertain. On Wednesday afternoon, Key was required to return to the debating chamber to correct one of his answers – a rare lapse for a Prime Minister.’

It had been a frustrating year, easily his most difficult year in politics to that point. Besides all the minor issues, the asset sales programme had been delayed by a case brought by the New Zealand Maori Council to the Waitangi Tribunal, which was then taken through three courts. Key had not helped matters with a comment on radio, on the day the tribunal began hearing the case, that the government could ignore its findings. Schools had lost patience with a new software system, Novopay, that had left too many staff with no pay for too long. And the budget that year had planned to increase school class sizes. Principals appealed to parents and Key reversed the cabinet’s decision as quickly as a good currency trader abandons a losing position.

He had always backed his ability to stay focused on the issues that really matter in politics and ignore those that might make news for a week but will be deservedly forgotten a week later. This year, though, trivia seemed to take on a life of its own. When they went to Hawaii at the end of 2012 he had a quiet discussion with Bronagh.

We had a talk about it after four years. Just kicked the tyres – are we still committed to all this? I used to worry about losing. Losing feels like failure and I don’t kinda like failure. But after a while, I thought, ‘Look, I really believe in what we are doing.’ Sure, I could walk away, but the test of being a successful Prime Minister in my mind is doing the best job I could do in the circumstances we faced. People have been writing this stuff about the GCSB and criticising us for it, but two agents made the decision that they got wrong and I had to carry it as the minister. Nothing I could do about that. Didn’t know about it, didn’t authorise it, wasn’t part of it, you are just there. I don’t beat myself up over that stuff because it has just come as part of the job. So we had a view – Bronagh was much stronger on it than I was – that I would be running away, and why would I do that?

As Bronagh puts it, ‘You don’t lose if you have done the best job you can do and see it through to the point that you have done all you can.’

Hawaii allowed him to have a break, recharge, do some thinking, and when they returned, he would start the New Year with a decision that would startle his ministers and revitalise his government.