National and state assets

State-owned enterprises float in murky political waters. John Key is about to tiptoe in.

He will tiptoe because this is a pond in which National could easily sink. The prevailing folklore is that Labour and National governments in the 1980s and 1990s flogged off state assets to greedy foreigners who made a bomb out of them for little or no gain to taxpayers.

It would be all too easy for Labour to fish votes out of the pond if Key could be branded as a 1990s Brash-ite “gone by lunchtime” fire salesman.

And Don Brash’s own past pronouncements don’t make easier Key’s task in his speech on Friday next week — the first in a series outlining National’s economic policy positioning, the following two being on the ownership society, a developing Labour focus, and growth.

When made leader in 2003 Brash declared natural monopolies such as Transpower would not be sold but others would be dealt with case by case.

Key’s political job is to finesse that line of attack.

So he will start from the proposition that there is no urgency for sales. After more than a decade of budget surpluses, the state balance sheet is in very good shape. In fact, as Michael Cullen pointed out on Monday, net government debt will be zero by 2008, if his superannuation fund is taken into account.

From then, as Key puts it, the state will in effect be acquiring financial assets. (That was his clinching argument in getting Brash to agree to keep the Cullen fund.)

So, step one in formulating National’s state-owned enterprises (SOE) policy is to ditch ideology for pragmatism. There is no balance sheet pressure, as there was when the privatisation programme started in 1987.

So does that mean yet another “me-too” from National to go with its acceptance of the Cullen fund and four weeks holiday, the original 2000 Employment Relations Act and the Health and Safety in Employment Act?

No, actually.

First, National will not adopt Labour’s policy “long-term hold” policy, which rejects sales almost out of hand. While Key will say there would not be an active policy of sales, he will not rule out sales in due course in certain circumstances and in certain industries for strategic reasons. National would not hold all the SOEs forever.

One logical candidate for sale — which Key will not confirm — would be one of the three state-owned electricity generators, to get a better functioning market. Other logical candidates — which also Key will not confirm — are some of the smaller companies, especially those in competitive markets.

A subsidiary aim Key has touched on in past speeches might be to free up funds to invest in infrastructure such as roads.

Second, National would approach balance-sheet issues differently from Labour.

Associate SOE Minister David Cunliffe is partway through a programme of agreements with SOE boards on benchmarking performance, the scope of the core business, equity and purchases and sale and the debt-equity ratio.

This has been a slow business and by the time of the December reshuffle, which brought Paul Swain in as full SOE minister to replace Mark Burton, several major SOEs had not signed up.

One major sticking point is the debt-equity ratio, which the government wants higher than some boards do and which it can enforce by sucking cash out of the SOEs.

That could, some fear, leave some SOEs’ credit ratings vulnerable if market conditions change. They fear it might in some cases force SOEs to compete with hospitals and roads for funds to grow their businesses if they need equity from the government to do that.

Remember that New Zealand Post had to get extra capital from the government to set up Kiwibank. Boards would prefer to be free to use retained earnings to develop new businesses or build new electricity generating plants.

Key unequivocally wants balance sheets to grow over time.

Third, National would be open to private sector equity participation as minority shareholders, though has not formulated a policy on this yet.

Labour has so far been wary of this option, though it could be a convenient way to introduce some market discipline, even if the shares were non-voting — as Air New Zealand’s minority shares do. One top SOE executive adds that it would also block ministers from treating SOEs as wholly owned subsidiaries they can order about.

Fourth, National would aim to enhance efficiency. To that end, National would appoint different boards.

The original 1980s and 1990s boards were a mix of commercial and expert skills. As one SOE grandee puts it, Labour’s boards since 1999 have been more representative of various social and political constituencies than of commercial skills. Translated, that means jobs for political hacks, who double as the cabinet’s eyes and ears.

Key wants the commercial skills mix back. And that goes for Crown companies which Key would treat similarly to SOEs. Crown companies are more directly subject to ministers’ orders — witness the imposition of the “charter” on Television New Zealand, which nonetheless is chastised if it doesn’t keep the dividends up.

So Key wants efficiency. But what about the argument that there are limits to efficiency in state ownership, that over time private owners subject to market disciplines are almost always more efficient?

The answer you probably won’t hear next week from Key is that deep down he agrees. Key has become adept at sizing the political boundaries to ideas.

But it is a safe bet that if National wins office in September and stays in office long enough, all but the monopolies and some other special cases will gradually be sold down and/or off. His political task is to ensure Labour cannot credibly make this case off his speech.

But is he being too coy?

Even in the nervous nineties there was public support for some sales, notably the railways — though, in the light of what happened to the railways in private ownership, that sentiment might be different now.

Would the public really storm the barricades if TV2 or Air New Zealand were sold off?

But that is academic. National needs this item neutralised as an election issue, just like the fourth week’s holiday. Key’s task in his speech next week is to do just that — while also presenting a credible programme of improved governance of SOEs and Crown companies for as long as they remain in state ownership.