Dialogue: Terralink shows rules have changed

Be warned: dealing with state-owned enterprises can damage your health. That is the message to business from the Terralink debacle.

A Government professing commitment to keeping SOEs in state hands and, in SOE Minister Mark Burton's words, "growing the businesses" has shown itself utterly unsentimental in disposing of a problem child.

Finance Minister Michael Cullen meant it when he said on January 15 that the Government was not in the business of running loss-making enterprises.

He has also made it crystal clear that SOEs are standalone businesses. They are not part of a portfolio, with the Government as a sort of holding company.

There is a precedent. When the DFC collapsed in the late 1980s, Japanese banks were sorely aggrieved when the Government left them to stew.

What is new now is that in the 1980s the SOE model was a transitional mechanism and now it is not. This evolving permanence has an important bearing on how SOEs are to be managed.

The first transitional element was to turn loss-making departments into profitable enterprises - which, in the hands of strictly commercial boards, SOEs did quickly. Then, that task fulfilled, Finance Ministers turned their minds to sale.

By the end of the 1990s, however, partly through sentiment (Television New Zealand, New Zealand Post), partly through a belief even on the right that some monopolies were best regulated through ownership (Transpower) and partly through sluggish decision-making (the remaining state electricity generators), some remained in state hands.

And now they have fallen into the hands of a Government with a powerful preference to hang on to them. That changes the rules.

If businesses dealing with an SOE have in the back of their minds the notion that the Government is determined to keep the SOE and develop it, they might be tempted - even subconsciously - to assume an implicit Government guarantee.

To disabuse them, a policy of retention paradoxically accentuates the need to run SOEs as standalone businesses. That point was reinforced by putting Terralink into receivership as if it were a private-sector company of similar size.

The Terralink warning for businesses is: SOEs can go bust, so draft contracts with them on that basis. The Terralink message for ministers is that, if they are going to hang on to SOEs, they must find away of diminishing risk.

If in the back of a Government's mind SOEs are in transition (however long) to private-sector ownership, ministers are less likely to inquire into the detail of how an SOE is run. If an SOE takes on risk and runs up profits or losses as a result, they can be capitalised in the eventual sale price.

But if in the front of a Government's mind there is never to be a sale, risky ventures assume critical importance as threats to the business, which Terralink has dramatically demonstrated.

Not only do captive shareholders - you and I - do our dough (at least $10 million on Terralink), but the integrity of the whole business may be on the block.

If the Airways Corporation gets into a grand overseas venture many times its size, what happens to air control here if the venture goes sour? And what about the postal service if Jim Anderton's Kiwibank goes sour?

The easy, old leftist answer would be that, since Kiwibank pursues an Alliance social objective (cheap banking for the poor and frail), it could be subsidised. But Labour ministers won't have a bar of that and have insisted on an "exit strategy" to protect the postal business.

So a policy of keeping SOEs in perpetuity raises a need for a mechanism to ensure boards do not let executives take undue risks. Ministers are now proceeding to think about this.

Whatever they come up with will by definition profoundly alter the original, strictly commercial, principle that is the core of the original SOE model. But the Government's SOE ideology also intends - indeed, requires - SOEs to prove, through successful trading, that private ownership is not intrinsically more profitable or commercially successful than public.

ColinJames@synapsis.co.nz

* Fran O'Sullivan's column will return next Monday.