Too-big-to-fail turned up in New Zealand this month — in triplicate.
Too-big-to-fail was the reason governments in the United States and parts of Europe gave for hosing taxpayers’ money into banks which had gone bust after reckless, deceptive and in some cases criminal behaviour.
The reason given for the bailouts was that to do nothing would have piled severe economic damage on the serious economic damage the banks had already done.
This social welfare (for that is what it is) is widely applauded, even though it is a transfer from the deserving — the taxpayers — to the undeserving, a neat inversion of values usually applied in debates on social and moral issues.
New Zealand bailed out the too-big-to-fail Bank of New Zealand when it went bust in 1989 and 1990. The Treasury believed that to let it stop trading would have deeply damaged the financial system and the economy. In the 2000s our banks, mainly Australian-owned, did not go feral like those in the United States, Iceland, Ireland, Britain and other parts of Europe. So they didn’t go bust.
But this month New Zealand has had its own examples of too-big-too-fail in three different forms.
First, Fonterra. It dominates the dairy industry which is about a quarter of merchandise exports. If Fonterra slips, the economy falters. If Fonterra fails safety tests, that damages the fresh/safe/natural country brand.
The cabinet is critically conscious of that and dispatched tough guy Steven Joyce to Fonterra to make the point.
The cabinet is discomforted — to use a modest word — by what it sees as Fonterra’s “inward-looking”, self-absorbed, self-important positioning as a self-contained farmer cooperative. Ministers grump that Fonterra does not know how to talk to the public, as its economic, brand and safety importance requires. Read that as also saying Fonterra now does not know how to talk to the cabinet.
Add in likely attacks from the Greens (babies versus a big, bad company) and Labour (desperate for traction) as the immediate crisis unity dissipates. Then add questions about the lack of science and external voices on the board and relevant rigour at executive and board level on safety (shades of the disgraced Pike River board). Then note its special regulatory status.
A cabinet frost now covers Fonterra’s iconic status. That frost will also cover Federated Farmers if it tries to bluster about dairy farmers’ importance to the economy.
It doesn’t help Fonterra’s relationship with ministers that a core part of the government’s infrastructure programme is building dams for water storage, much of it for more cows.
Remember also that the government’s part in this project is funded by proceeds from the Mighty River Power and Meridian Energy sales.
Which takes us to the second too-big-to-fail: Pacific Aluminium and its Tiwai Point smelter.
Pacific Aluminium is owned by Rio Tinto, a global giant well able to absorb Tiwai’s (temporary?) losses. Nevertheless, New Zealand taxpayers, courtesy the cabinet, are to graciously dole out $30 million to this latest welfare beneficiary — your gift to Rio Tinto’s shareholders.
There is some offset news. Tiwai’s employees and local contractors get time to adjust. The handout buys time for Transpower to fully link Manapouri into the national grid so others can use the power Rio Tinto relinquishes when it scarpers. And, for the asset-sales-fixated cabinet, Meridian’s prospective share sale price lifts a bit.
Behind-scenes, the cabinet is no less grumpy about Rio Tinto than about Fonterra. But the commercial — and political — reality is that Tiwai Point is for now and a while longer too big to fail.
Chorus is, too, for yet another reason.
Chorus has found the cost of rolling out fibre for ultra-fast broadband (UFB) is higher than it projected when pricing its contract bid. Since Chorus is doing most of the roll-out, if it fails, so does the roll-out, which is a too-big-to-fail project. So: a cabinet minimum price deal on the copper network, UFB’s competition.
Other players like Vodafone don’t like this sudden change of rules for one player — a practice now not unusual in the Key era when a Warner Brothers or a Sky City can pitch for special treatment. Special responses to special pleading are not what the 1980s designers of the level-playing-field market-led economy intended.
To be fair, there is again an offset: by also bringing forward the review of the post-UFB-rollout rules, there might be earlier certainty of the post-rollout environment. Players not in the Prime Minister’s ear value regulatory certainty.
But here is the Key rule: get so big ministers will fear your failure, as a reliable exporter or big power-eating plant or big infrastructure provider or in another niche, especially if also a political bother. The rules are different for big fellas, just as for the northern hemisphere banks.
It is the small people, stuck with the rules, who pay. That’s the 2010s business version of social welfare.