How best to run the not-for-sale SOEs

Politicians will shortly engage in bloodsport with Television New Zealand’s board, executives and stars. All good fun but what will it tell us?

It will tell us at least one board member is too nosey-parker, stars are paid too much for the Prime Minister’s liking and much shareholder value has been destroyed. But we know all that.

What it won’t tell us is how state companies should best be run. That is because TVNZ is now a special case — not just because it has been turned from a state-owned enterprise (SOE) into a Crown company, to allow for non-commercial instructions from the government, but also because it is an impossible hybrid: a broadcaster which must win the ratings war and also (non-commercially) uplift us and reflect our nation back to us.

But among those Parliament’s finance and expenditure committee inquisitors have summoned is Rob Cameron.

Cameron, now an investment banker, was a young Treasury officer in the mid-1980s leadup to corporatising government trading departments.

Last year he wrote a paper for SOE bosses on how best to organise SOEs if they are not to be sold. That has now been published in a book* celebrating economist Sir Frank Holmes’ contributions to public policy.

Cameron takes it as read that “long-term hold”, the present government’s SOE policy, has in effect supplanted the original “prepare for sale” model. “Wholesale privatisations are unlikely under any government, though some assets could be shifted to private ownership for competition reasons,” he says — and the National party’s supercautious positioning during the election underlines that.

Late in 2004 John Key was musing on 20 per cent selldowns and sell-offs of some SOEs over time. By campaign time this had dwindled to selling some of Landcorp’s farms and maybe allowing Solid Energy to partner with a private sector company.

If SOEs are to be kept in taxpayer ownership, how should they be run? Not as they have been, Cameron concludes.

He divides corporations into closed (closely held and with only limited separation of ownership and control) and open (markedly separated ownership and control). Perhaps surprisingly, he classes SOEs as open corporations.

“There is a high level of separation between the ultimate risk-bearers (citizens) and control (the board and management),” he says. “Ministers and officials are not effective proxies for real owners… they have no wealth at stake [nor] the specific knowledge capabilities or the time to become centrally involved in management and decision-making [and] there is benefit to be had from specialist decision-making by expert boards and management.”

Yes, except that politicians feel the need to appoint to SOE boards people who are specialist not in corporate governance but in the political predilections of the governing party. Which was part of departing chief executive Ian Fraser’s problem at TVNZ.

“Best practice,” Cameron says, “requires that the shareholding ministers appoint the chairs of SOE boards but leave the chair and/or the board appointments committee to take responsibility for the composition of the board and appointments.” And leave the board to run the show.

Instead, ministers and officials have been hovering, conducting long-term reviews of the SOEs, including of their debt-equity ratios and capital spending. Some SOE bosses resent this intrusion into their territory and around a third of the long-term reviews have yet to be completed.

The risk for taxpayers is suboptimal value for their forced investment. That is, they could be getting better dividends.

Cameron suggests several ways to improve monitoring by ministers and officials, including an advisory panel for boards, a best-practice information disclosure regime to enable better analysis by outsiders and commissioning private sector reports.

And, he adds, issuing “non-voting equity”. That is, partial selldowns, as Key originally proposed. Key says a minority private shareholding imposes market disciplines. Private sector analysts get interested and governance sharpens in response. Cameron adds that it improves information to ministers and officials and encourages a flow of talent from the private sector.

It would also free up capital for roads and other capital projects. Moreover, dividends to the government might well not drop commensurately with the selldowns if commercial performance improved. So it could be win-win.

But new SOE Minister Trevor Mallard rules out partial selldowns as in effect privatisation and contrary to Labour policy. He is more interested in bond placements. Growth in SOEs’ equity has been proportionately greater than growth in their debt, he says.

Labour allies New Zealand First and the Greens share Mallard’s suspicion. A partial selldown might be the top of a slippery slope leading back to the “prepare for sale” model.

And there is support from the other side of politics in Australia. My private soundings of experience with the partially sold-down Telstra, both in the cabinet and in the executive suite, suggest minority shareholdings leave an SOE still the minister’s baby (to answer to voters for), which limits the commercial benefits. A partial selldown should, in other words, be seen as a way-station to full privatisation.

But another Labour’s ally, United Future, backs 40 per cent selldowns. And ACT wants privatisation.

And Australia is not New Zealand. Politics and lobbying infuse decisions more insidiously than here (at least, so far). Perhaps Cameron’s evidence at the TVNZ inquiry might strike a tiny spark in the timorous National party caucus. National will be the government sometime.

* The Visible Hand (Institute of Policy Studies, Wellington).