We own the SOEs — so how to get more from them?

As the general mood becomes less cheery and the government begins a gentle slide down the polls, it is trying harder to look fresh, inventive and solicitous of business needs.

Even tax rate cuts are no longer ruled out, though still heavily qualified. Competition rules are being turned over, the quality of regulations and their implementation is to be scrutinised — and state-owned enterprises (SOEs) are likely to get more latitude.

This last is not public. But at a meeting with SOE chairs on May 23 Finance Minister Michael Cullen and SOE Minister Trevor Mallard are reported to have been more open-minded than hitherto.

There was even a whisper, I am told, that private equity injections might play a part in SOEs’ expansion.

Neither minister would comment for this column, which should not be taken as confirmation. But there is a logic.

One of the government’s three themes for its third term is “economic transformation”, a slogan it has used for some years but has now elevated into a totem.

When telecommunications unbundling came up, putting it into the “economic transformation” bag gave it urgency and impetus at the cabinet table. Here was an iconic initiative the government could use to show it meant business.

Now ask who owns large New Zealand businesses. Apart from Fonterra and a handful of others, most large businesses operating here are either foreign-owned (and mainly or only concerned with local market share) or are SOEs.

So SOEs have acquired in ministers’ minds a new importance as potential engines of economic growth and transformation, not just here but offshore.

But don’t government-owned institutions have to be risk-averse? And hasn’t the addition of political hacks to SOE boards queered their governance?

John Key was making this point 18 months ago before National party managers manhandled him into a no-sell election policy (except for some Landcorp farms and maybe allowing Solid Energy to partner with a private sector company). Party managers feared voter fear of wholesale 1980s-style privatisations, especially given Don Brash’s reputation as an economic purist.

This no-sell policy put paid even to Key’s advocacy of partial sell-downs. He talked of 20 per cent. Gordon Copeland of United Future went for 40 per cent.

Key and Copeland had two reasons for pushing partial sell-downs.

One was to improve governance. For reasons cogently argued by investment banker Rob Cameron in a book last year, even a small minority shareholding can sharpen a closely-held company because it imposes market disciplines. Private sector analysts get interested — even if the private equity is non-voting, as Cameron suggested — and governance sharpens in response. It also improves information to ministers and officials and encourages a flow of talent from the private sector.

So a partial sell-down should lift profitability. Good for the taxpayer.

The second reason was to free up capital for roads and other below-the-line items. Moreover, dividends to the government might well not drop commensurately with a sell-down if commercial performance improved. So it could be win-win for the taxpayer.

Mallard bluntly ruled out minority shareholdings last November. The 2005 election manifesto ruled them out, too. So what might that whisper that excited some SOE chairs have meant?

Stir in the ministers’ analysis of foreign dominance. Then add the limits a slower economy impose on the cash available to the government for its ambitious infrastructure programme and for any large projects SOEs want or need to undertake which they can’t fund from retained profits or debt.

Then note Keith Turner’s highly successful venture into Australian power generation which netted an $800 million Meridian dividend for Cullen this week (to pay for roads). SOEs can do well offshore (despite early problems with New Zealand Post’s Transend). Add Kiwibank’s above-forecast performance, which has justified Jim Anderton’s determination back in 2000. And there was Post’s 50-50 courier deal with DHS.

So there is a both a push and a pull to revisit the manifesto — if not to allow sell-downs then at least to allow new private equity to enable SOEs to expand. Limiting such minority shareholdings to a non-voting 20 per cent would confine the political fuss to diehard socialists and nationalists in the left of the Labour party, the Greens and New Zealand First.

It would trump National. And business could only applaud.

But there are Labour’s manifesto and Mallard’s denial. Moreover, having to respect minority shareholders would preclude ministers from “fireside chats”, as one SOE notable puts it, with boards and chief executives. Ministers could be less hands-on.

So that whisper from last week’s fireside chat might more safely be interpreted less as contemplating private equity in the parent SOE than as a more relaxed ministerial attitude to how SOEs capitalise and run subsidiaries, especially offshore. Private equity in subsidiaries does not compromise the manifesto and increases SOEs’ leverage.

Ministers were also intimating to SOE chairs a general willingness to be less risk-averse, to allow SOEs more latitude to follow their commercial judgment and build their businesses to get the expansion offshore which they want but cannot expect from foreign-owned companies.

Being less risk-averse with SOEs is politically risky because more risk means not just more successes but more failures.

But to get a fourth term ministers have to take risks this term. That gives the reports from last week’s hui some voice. State capitalism may be on the move.