State-owned enterprises make money for taxpayers. But do they make enough? John Key’s government wants more. But Key has “contracts” with the voters which limit his options.
SOEs were set up to be sold. For that they had to be turned into fully commercial operations, making profits and paying dividends to the taxpayer.
But since 1999 the rule has been “long-term hold” — no sales. That required more strategic and operational latitude, including buying and selling non-core subsidiaries and partnerships with outside companies and, in one case, venture capital seeding of startups. The idea was to use SOEs’ weight to drive economic development.
Labour kept the commercial primary focus and mostly listened to board chairs when appointing directors. But it also put politically sympathetic directors on the boards.
National has signed up to “long-term hold” — for now. It aims to tighten the focus on to commercial performance. Boards are to be rebuilt to reflect that.
The boards’ job, Finance Minister Bill English and SOE Minister Simon Power will tell chairs, is to generate a better return on their capital than last year’s 1.5 per cent average.
A higher return means cutting costs — firing staff and/or improving efficiency — and increasing revenue — higher prices (not easy in tough trading conditions) or new or better products and services.
But how will English and Power know? They think the Treasury’s Crown Company Monitoring Advisory Unit has not been focused on the right things.
The challenge, investment banker Rob Cameron says, is to replicate the assessment share markets make of listed public companies.
Cameron, a 1980s Treasury official who has studied SOEs in depth, suggests ministers should appoint only board chairs, who would appoint the other directors and set their tenures.
Cameron proposes “an advisory capability” to help ministers assess boards’ performance, which he says should be ministers’ core job. Boards should issue similar financial and operating information to that required of publicly listed companies and (as some SOEs have done) “engage experienced and qualified private-sector analysts” to monitor the performance of their SOEs.
None of that is inconsistent with National’s approach. It skirts privatisation, the P-word from which National fled in fear in the 2005 and 2008 elections.
But Cameron also says: inject outside equity into SOEs and thereby subject them to sharemarket scrutiny; do that by issuing non-voting shares, which would leave the government in full control; let the Superannuation Fund buy some voting shares and appoint some directors. Still no P-word — not really.
Why outside equity? If SOEs are to grow revenue, fatten dividends to taxpayers and boost economic growth, some will need more capital.
Under present rules an SOE has to hoard capital from profits (after paying a dividend under a set formula), cajole capital out of ministers or raise debt. There is a limit to what can be done through non-core subsidiaries.
New Zealand Post is raising up to $200 million in notes (debt) right now, in part to expand its fast-growing core subsidiary Kiwibank’s capital, needed to comply with Reserve Bank rules.
If the government wanted to use Kiwibank to channel government-backed funding to small-medium enterprises (if, say, the economy turns much worse than Key’s soothing assurances and/or if the Australian banks clamp down), it would need to boost Kiwibank’s capital.
Key won’t take the Cameron route because he says he has a P-word “contract” with voters and he fears even non-voting shares in even the popular Kiwibank could be branded as privatisation.
Actually, Key has two levels of contract. One is his specific pledges. Another is to deliver good government, in response to economic and other conditions as they change — and they have changed.
Moreover, Key has huge political capital, enough to afford a P-risk if in time it delivered on his good government contract. As all capitalists know, sometimes a small risk can pay a big dividend.
But Key has another basis for reticence. Ministers think fixing SOEs will take several years: the right chairs and boards have to be installed and electricity regulation rejigged, for example. And ministers think the government’s low debt gives them the fiscal leeway to take time.
That fiscal leeway is at the heart of the debate over core public sector spending. There is a “quick and dirty” job in this year’s Budget, to hold the line. But there is harder work to do if the now big annual deficit is not to turn structural: identify and rank departments’ functions, drop the least productive, get efficiencies, reduce overall costs — and find CEOs who can and want to do all that. This is a three-to-five-year programme.
The state is big in our economy. If ministers manage it better, that will deliver on the good government contract. Which, ultimately, is the only contract that wins multiple terms in office.