Change of policy for State Owned Enterprises
State Owned Enterprises and Economic Development Minister Trevor Mallard today announced a change in policy for State Owned Enterprises, which will encourage them to get into new business areas to help build New Zealand's wealth.
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State Owned Enterprises and Economic Development Minister Trevor Mallard today announced a change in policy for State Owned Enterprises, which will encourage them to get into new business areas to help build New Zealand's wealth.
"This new policy means that State Owned Enterprises will be a part of our work to transform the New Zealand economy. What I am announcing today is that from now on, State Owned Enterprises will be encouraged to expand into new areas of business that are linked to what they already do," Trevor Mallard said in a speech to the Otago Chamber of Commerce in Dunedin.
"To do so they will have to meet strict conditions, and their new business must have good spin-offs - for communities but also potentially for private firms.
"New Zealanders have agreed that we should keep state assets in public hands. But that does not mean that they should not be put to work for us.
"They're big commercial operations and that's why they're perfectly placed to play a key role in helping to change New Zealand into an innovative, high-wage and high-value economy.
"Essentially Cabinet has agreed to consider proposals from SOEs that broaden their scope of business by diversifying their technological, product and market portfolios and that extend the time horizon over which they seek to capture a return on investments. Yesterday I wrote to SOE chairs to outline this new approach.
"While the government is now actively encouraging SOEs to consider this opportunity, ministers don't intend to tell them how they might do this. It will be up to SOEs to come up with robust business plans that can preferably be funded off their own balance sheet and that meet the criteria.
"Each proposal will be considered on a case-by-case basis. There must be broader spillover benefits to the economy such as giving other companies opportunities to input into the new business with research and development or technology.
"There are risks, and the government is not about to play fast and loose with taxpayer assets. That's why certain criteria must be met before the okay is given to make sure that the focus on core activity is not lost.
"SOEs might start to think of putting up proposals for amended scope of business when they are developing their Statements of Corporate Intent for the 2007/08 or even the subsequent financial year. But I will not rule out favourable consideration of opportunistic investments outside of the planning cycle," Trevor Mallard said.
The criteria for diversification follows and are on www.beehive.govt.nz/mallard/ along with the cabinet paper.
Criteria for State Owned Enterprises diversification
Diversification must be based on an effective utilisation of existing core competencies and it must be into adjacent technologies, products and markets.
New activities should have a demonstrated potential to enhance the competitive competencies of other firms and industries, or - to use the jargon - that have spillover benefits.
Other than in very rare circumstances, the diversification should be able to be financed off the existing balance sheet of the SOE.
Any revised scope of business must be accompanied by robust evaluation processes using explicit performance indicators, leading to a clear exit route for ventures that are not going anywhere.
What are the State Owned Enterprises and how big are they?
AgriQuality, Airways Corporation, Animal Control Products, Asure NZ, Genesis Power, Landcorp, Learning Media, Meridian Energy, MetService, Mighty River Power, NZ Post, ONTRACK, Quotable Value, Solid Energy, Timberlands, Transmission Holdings and Transpower.
They vary in size, but the largest are very big in the New Zealand context. The five largest by asset value - Meridian Energy, Transpower, Mighty River Power, NZ Post and Genesis - have assets in excess of $2 billion each, and the three largest are likely to rank among the top 20 biggest firms in New Zealand.
When and how does the initiative take effect?
Immediately. SOEs are encouraged to review their existing scope of business and start to consider options for diversification based on their existing core competencies. However, any proposals for expanded scope are unlikely to be formally considered until the next business planning round, and be reflected in their draft statements of corporate intent (SCIs) for 2007/08.
SOEs will be responsible for suggesting new initiatives and/or lines of business, which may need to be reflected in amendments to their SCIs. The government will also amend the Owner's Expectation Manual to reflect the change in approach.
In the criteria that SOEs must meet in order to diversify, what is meant by spillover benefits?
Spillover benefits are benefits that flow to other companies as a result of the SOE diversification.
It is difficult to predict the specific types of spillover benefits that may be generated. However, in a general sense, examples could include opportunities for other companies to provide R&D or other specialised contracting services associated with a new SOE investment (egs. CRIs, university research departments), or opportunities to manufacture new products used as an input to a new SOE business venture.
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SOE Policy: Dumb and Now Dumber
The government’s decision to encourage state-owned enterprises to expand into new areas of business has had a bad reception from commentators.
And rightly so. The government talks about ‘evidence-based policy’ – making policy on the basis of relevant facts and research. Yet empirical evidence, not ideology, strongly points to the folly of government ownership of commercial enterprises, let alone a policy of diversification.
The decision was taken in the name of ‘economic transformation’. This is a meaningless buzzword, but in essence the government is talking about economic growth. Minister Trevor Mallard put the issue in this context: “Economies need to grow. This is the only way that society collectively can generate the output needed to improve services and raise living standards for New Zealanders.”
Few issues in economics have been subject to more exhaustive empirical investigation than the relative performance of private and government-owned commercial enterprises in using resources efficiently, generating profits and contributing to economic growth.
Surveys by the OECD and the World Bank reviewing over 50 published empirical studies examining hundreds of privatisations around the world conclude that, on average and over time, private firms out-perform their state-owned counterparts.
The qualifier “on average and over time” is important. Clearly some private firms fail and some SOEs succeed, at least for a time.
Air New Zealand is an example of a privatised company that failed. However, the government had other options than bailing it out. Moreover, even though the board and management have done a creditable job of giving it a chance of survival, the company has been a poor investment from the point of view of taxpayers. The Crown has made a zero return on its investment at a time when the NZX gross index has risen by around 77%. The Air New Zealand case reinforces rather than undermines the case for governments getting out of running businesses.
Because the odds are against successful state enterprise, the government’s decision to allow SOEs to expand beyond their core business, in addition to its unique (among OECD countries) stance against privatisation and its renationalisation initiatives (such as accident insurance, Kiwibank, Air New Zealand and the rail track), must be bad for growth.
The reasons for expected poorer performance were spelled out by the government’s advisers, none of which supported the decision. The Ministry of Economic Development, the Treasury and the Crown Company Monitoring Advisory Unit (CCMAU) variously pointed out that:
· current arrangements already allow limited forms of diversification;
· the proposal risks diverting the focus of management away from core business (such as ensuring reliable power supplies to Auckland);
· SOEs are not subject to normal market disciplines (such as share price performance and takeovers) and the ability to monitor them is weak.
The last point is important. Taxpayers have no way of knowing whether their investments in SOEs are yielding competitive returns. In Australia the Productivity Commission reports annually on the financial performance of government trading enterprises (and it regularly finds that many do not meet their cost of capital). CCMAU has done a poor job in not providing transparent information on SOE performance.
The cabinet paper acknowledges that at best any benefits of the new policy would be “small”. The evidence cited earlier suggests they are likely to be negative. The idea that the policy could contribute meaningfully to “economic transformation” doesn’t pass the laugh test.
The SOE model was always an uncomfortable halfway house. Businesses need to change and grow, yet taxpayer risks are increased by diversification. The only solution to the dilemma is privatisation.
‘Public ownership of the means of production, ownership and exchange’ is a policy that has failed worldwide, yet New Zealand has its head in the sand on the issue. Even the National Party, which was founded in defence of private enterprise, had a weak position on privatisation going into the last election. It ought to have been embarrassed that the government’s partner, United Future, which advocates minority private shareholdings in SOEs, had a stronger one.
And the illogical basis of the government’s position is illustrated by the sale of Meridian’s Australian business and the sensible decision to use the proceeds to invest in Auckland roading. If it makes sense to divest SOE assets in Australia, why doesn’t it make sense to divest them in New Zealand?
A 2002 Business Roundtable study concluded on the basis of World Bank estimates that New Zealand could gain over $1 billion a year or around 1% of annual GDP by privatising SOEs. That estimate made no allowance for assets held by local government, which are as large as ‘Total Crown’ assets.
Such moves would deepen New Zealand’s capital markets, promote the ‘ownership society’ the government talks about, facilitate tax reductions, and reliably contribute to the government’s stated goal of faster economic growth.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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