BOLD MOVE: John Key announces the Government might partially privatise four state-owned enterprises and sell down its Air New Zealand stake.

John Key is nailing his colours to the mast. "If that costs us the election, that costs us the election," the prime minister told reporters after announcing the potential sale of state assets in a speech on Wednesday.

Few doubt it will be a defining issues of the campaign.

"It's going to be a hot topic," says economist Roger Bowden, former professor of economics and finance at Victoria University. "Hotter than the size of the sales would warrant. It's more than hot."

The Government's nervousness was apparent in the way Mr Key set the scene for selling up to 49 per cent of four huge state-owned companies: Meridian, Mighty River Power, Genesis and Solid Energy.

"Through decades of under-saving, over-spending and over-borrowing, the public and private sectors have together built up a net foreign debt equivalent to 85 per cent of GDP (gross domestic product)," he said.

"To put it in context, the only other developed countries with a foreign debt the size of ours are Greece, Portugal, Spain and Ireland. That is very uneasy company indeed."

Greece's government was such a financial basket case it needed a 110b (NZ$195b) bailout from the International Monetary Fund and the European Union last May, along with austerity measures that led to rioting.

Ireland's government collapsed this month after it was forced to accept a bailout in November.

Invoking such spectres is "spin doctoring", says Mr Bowden.

"They've quoted the wrong figure," he says. "They've quoted New Zealand's total debt position, including private sector debt. The correct figure to quote is the government sector debt and that's not huge."

In fact, banks owe the bulk of debt to foreigners and the Government's net foreign debt is relatively small.

Standard & Poor's rates our government financial strength as AA-, or very strong.

"If we believed that New Zealand's credit quality was similar to Greece or Ireland its rating would be similar to Ireland or Greece," says analyst Kyran Curry.

Greece and Ireland's S&P ratings, post bailouts, are BB+ and A respectively.

"New Zealand governments on either side of the political spectrum tend to do what they say they're going to do and they've got a long history of fiscal conservatism that is unrivalled by many sovereigns we look at," says Mr Curry. "The fact government debt is so low is a good illustration of that."

How low? Government financial statements released on Thursday put net government debt at $35.9b, or 18.8 per cent of GDP.

For Mr Bowden, if the Government thinks reducing debt is a reason for selling down state-owned companies, it isn't a good one.

"The dividends for those entities, particularly in the future, actually help to pay – and probably more than pay – the servicing on any extra debt involved."

Still, for all its over-anxiousness to justify a potentially controversial policy, the Government does have good reasons to propose an SOE sell-down.

Brian Easton, an economist known for left-of-centre views, is wary the scheme will block future policy options for the electricity sector but supports the benefits it can bring to the local investment scene.

"By increasing the opportunities for New Zealanders by offering shares in minority stakes in SOEs, you would partly moderate the stupidity that happened over the finance company sector," he says. "That enrichment of the financial market, which incidentally, curiously, Rob Cameron and I agree on, is a very strong case."

Mr Cameron, principal of investment bank Cameron partners, has been a key figure in the SOE debate for years, most recently chairing the Labour government-sponsored Capital Markets Development Taskforce.

When it reported in December 2009, one of the taskforce's key recommendations was the partial listing of SOEs and its arguments drew a direct link between the health of investment markets and the New Zealand economy.

A year later government ministers met in Wellington to thrash out the policy and prepare the ground for Mr Key's announcement.

Stock exchange chief executive Mark Weldon was impressed.

"It was bold, it was clear, it was early – and very positive in that it sets out the parameters for what I really hope will be a reasonable and fully informed dialogue.

"You've seen the fearmongering start to happen, but that's not a story that can last forever. It's a one or two day news cycle really, and beyond that you start to dig into it.

"What I really like about the policy is it's not left wing, it's not right wing ... It's based on the Air New Zealand model which has the great attribute of actually being shown to work."

Air New Zealand, 75 per cent government-owned since its taxpayer rescue 10 years ago, has performed well and delivered better dividends than the power SOEs in recent years.

"If you talk to [CEO] Rob Fyfe or [chairman [John Palmer] they will tell you that the majority long-term ownership of the government has been a real positive," says Mr Weldon, "because it means they can focus on long-term planning and not worry about being taken over, as they would if they were a fully free-float company."

Under National's proposals, the Government will consider selling its Air New Zealand stake down to about 51 per cent.

While there will be debate in coming months about the economic benefits of selling down SOEs, one of the big issues will involve how to maximise New Zealand ownership of the floated shares – an explicit goal in the government's policy.

Technically, once shares are in private hands they are free to be sold to all comers, including foreigners. Mr Bowden is among commentators who argue local investors will quickly succumb to the siren song of foreign buyers.

"Of course Kiwis are supposed to get priority, but what in fact happens is the float's staged off, or something like that and the typical Kiwi investor probably has a short horizon and off they'll go.

"I would think the Chinese will quickly take a large interest in Solid Energy."

That view of investor behaviour is not shared by some senior sharemarket executives.

"Evidence would tell you if you look at Auckland Airport or Contact Energy, you've got a stable register of people who got shares when they floated and they've kept them," says Mr Weldon. "New Zealand retail investors have a habit of buying shares and holding them."

First NZ Capital chief executive Scott St John says equity investment is owning and holding really good companies over long periods of time. "Certainly the behaviour we see in our firm is that by and large most Kiwis buy and hold."

In addition, the combination of a government majority stake and the Takeovers Code will prevent anyone from owning more than 20 per cent.

But whatever the ultimate choices of investors, the Government clearly wants to put New Zealanders "at the front of the queue".

"The Government would need to be confident of widespread and substantial New Zealand share ownership," said Mr Key.

So how might that be achieved?

Several options are likely to be discussed, including those used last November by the state of Queensland in floating giant rail freight company QR National.

In the biggest public share sale since Telstra, Queensland raised A$4.6b (NZ$5.8b) from selling 66 per cent of the company to the public and institutional investors.

Along the way it favoured retail investors with a A10c a share discount, a price cap and priority allocation for Queensland residents. Short term sales were discouraged by offering a loyalty bonus of one share for every 20 held until December this year. Queenslanders got a priority loyalty bonus of one share for every 15.

But New Zealand share ownership shouldn't be seen simply as private holdings by retail investors, says Mr St John.

"There are various different constituencies within that," he says.

"There are seriously New Zealand institutions like the ACC and Super Fund, then institutions that may be foreign-owned but represent New Zealand savers, like AMP and others, there are what I might call pseudo-institutional New Zealand groupings such as iwi, then there are private investors, and then in the case of some of these companies there are clients."

By clients, Mr St John means the power companies' customers. In previous floats such as TrustPower or Vector, customers received priority allocations.

Or as another example, "if they thought iwi was the most important thing, they might negotiate a pre-IPO deal with iwi, where they ended up owning 10 per cent of company ABC, and then they might come to market. The important thing to understand is that the Crown has a lot of levers at its disposal to ensure they achieve the outcome they desire."

Among the options, Mr Weldon sees KiwiSaver as a vital component in the mix.

"You've got 1.6 million people in KiwiSaver already, right? It would be pretty easy to send out a notice to all 1.6 million KiwiSavers and say `here is Meridian, it's coming to market, do you want to put some shares of Meridian into your KiwiSaver account?'

"And what's interesting about that from a long-term ownership perspective, is KiwiSaver gets released when you retire, so that stuff will be locked up in direct New Zealand ownership hands and they'll get the benefit of dividends and growth [until they retire]."

While the likely structure of potential share sales should emerge during the year, we should not expect a big bang sale of 49 per cent of all four companies at once.

"It seemed to me [John Key's speech] was relatively explicit," says Mr St John. "It didn't predetermine, necessarily, a march towards 51 per cent [state ownership]. It seemed to be the first step in a process that absolutely ensured New Zealanders were front and centre if it happened, and essentially linking it into the savings debate."

The Government's balance sheet was not so stressed that quick asset sales were required.

"There is no need in first half of next year for this money to be in the tin. We don't have that sort of pressure as a country. If they end up going down this path, there is no reason to do this in anything other than a measured and careful way."

That being the case, Solid Energy, whose board's valuation is wildly divergent from sharemarket analysts', could well be the last of the four off the blocks as the capital demands of its various projects are assessed.

But first, of course, National must convince the electorate its ideas are worth voting for.