Dialogue: Government's business is not business

By LOCKWOOD SMITH*

By the mid-1980s, a large proportion of New Zealand's capital stock was owned by the Government. The productivity of those assets was being compromised because politicians would not let commercial objectives drive decision-making.

The SOE model created a framework for the Government to retain ownership of those assets, but at the same time allow the businesses to be freed from political interference. Only in this way could the Government ensure that the portion of the economy it retained ownership of made the maximum contribution to economic growth.

Unfortunately, under this Government, adding political objectives back into the objectives of Crown enterprises is detracting from economic growth and destroying the value of these organisations to the taxpayer.

In an ideal world, a Government should govern, and not compete with its own citizens in business. In governing, the Government should aim to protect New Zealanders and their property from harm. It also has a duty to provide public institutions and services that are desirable, but which would not otherwise be provided. The latter objective provides a rationale for limited Government involvement in business.

In general, governments are not well suited to running successful business. This is not intended to put down the abilities of those employed to guide and operate those businesses. Indeed, many of them are highly skilled and commercially astute. Rather, the government has to represent the collective interests of all New Zealanders and as a result, appropriately, has multiple objectives.

This multiplicity of objectives would add great complexity to the accountability, governance and management frameworks of any company. The additional complexity translates into greater risks for a state-owned enterprise, and taxpayers at large carry that risk as they are the ultimate shareholders.

The State Owned Enterprise Act 1986 was designed to separate an SOE's social objectives from the principal commercial objective. This was intended to free the SOE to concentrate on its main objective of running a successful business. The Government was required to compensate the SOE for having non-commercial objectives, thus making transparent the cost of those services.

By and large, the SOE model has been reasonably successful. A recent study of five SOEs commissioned by the Treasury (The Economic Performance of Five State Owned Enterprises 1989 to 1998 - NZ Institute for the Study of Competition and Regulation 2000) concluded that the SOE model arguably represents the best attempt to have efficient public businesses.

But the model is not perfect, mainly because politicians cannot resist interfering. Irresponsible politicians prefer to hide the cost to taxpayers of their political interference. That way, the public cannot judge for themselves conclusively the costs of the interference.

But already, the public can see that the Labour Government's decision to intervene and introduce non-commercial objectives to TVNZ and NZ Post, has destroyed and will continue to destroy millions of dollars of value in these companies. The New Zealand taxpayer ultimately bears that loss in value.

And that loss is more than just a loss of shareholder value. SOEs make profits and pay dividends to the Government that help pay for essential services.

That matters because of the Crown's equity interest in the SOEs adds up to around $5.5 billion and the Crown last year collected $450 million in dividends, - a dividend yield of around 8 per cent. That is enough to finance over 60,000 tertiary students, almost 40 per cent of tertiary places, which in Mr Maharey's world is enough to fill up 1 1/2 Carisbrooks.

In the 2000 financial year, TVNZ returned $43 million in net profits after tax, a 12.9 per cent return on equity, or 9.1 per cent on sales. This year, that profit figure is expected to deteriorate significantly to a probable small loss for the year overall as a result of Government interference.

NZ Post was similarly a very profitable business, but is having to deal with major issues around its core business of postal services which it will continue to find difficult to resolve under Government ownership. Meanwhile, the People's Bank is creating a distraction from its core business.

So the SOE model works when it is allowed to work. That is, let essentially commercial enterprises act commercially and in the best interest of the shareholder - otherwise known as the taxpayer. But even this model cannot withstand political interference.

* Lockwood Smith is the National Party spokesman on SOEs.